Notice of
Annual Meeting of Shareholders
Proxy Statement
Y 9
Herman Miller, Inc. and Subsidiaries
September 3, 2019
Dear Fellow Herman Miller Shareholder,
I joined Herman Miller in 2018, knowing it was a company with a rich history of believing in bigger ideas about what a company can do for its
customers, shareholders, and communities. In the months since, I’ve been energized as I witness our mission of “inspiring designs to help
people do great things” in action. I’m proud of our 8,000 employees who harness the same creativity, spirit, and dedication our company was
founded on to help drive meaningful progress toward our mission and our financial results.
For fiscal year 2019, sales of $2.57 billion marked a record level for the fourth consecutive year and reflected growth across each of our business
segments. While we faced higher commodity and tariff costs, we offset these pressures through well-managed operating expenses to drive
operating margin expansion for the full year. We reported diluted earnings per share on a GAAP basis of $2.70 for fiscal year 2019, and adjusted
EPS of $2.97(1) increased by 29% over the prior year. Based on our financial performance and confidence in our strategic direction, we announced
a 6% dividend increase in June 2019.
Our innovation pipeline has been active this year. We launched the Cosm high performance office chair, Canvas Vista desking system, and
Overlay moveable wall offering, which all outperformed our expectations. Cosm in particular won a number of awards, including the Fast Company
Innovation by Design Award and the Orgatec Innovation Award. We also invested in bringing HAY’s influential product design and democratic
pricing into our North American contract and retail ecosystem and expanded our offering by investing in Maars Living Walls, a global leader in
architectural glass walls.
Our competitive landscape and the realities our customers face also continue to evolve. With that in mind, and with a newly-assembled leadership
team in place, we’ve been deeply engaged in developing and rolling out our new strategic plan over the past year to address these new realities.
The following four pillars of our strategic plan aim to help us create value for both our customers and our shareholders, and we are already
making progress on each.
Unlock the Power of One Herman Miller
Our product offering has evolved substantially over the years as a result of new product development, M&A, and strategic partnerships. We’ve
evolved into the Herman Miller Group: a family of brands that collectively offers a purposeful variety of products for wherever people live, learn,
work, and heal. We showcased the power of our brands working together in the All Together Now exhibition at Milan Design Week, and at
Chicago’s NeoCon tradeshow, where we were honored to be recognized for the Best Large Showroom.
Coming together as One Herman Miller helps us achieve our goals of more actively moving into the consumer marketplace, growing globally,
and making it easier to do business with us. In order to fully leverage the power of coming together as One Herman Miller, we are undertaking
efforts to become more agile, invest in responsive innovation, simplify our go-to-market strategy, and continue to lead in product innovation
across all of our businesses around the world.
Build a Customer-centric, Digitally-enabled Business Model
Building a customer-centric and digitally-enabled business model is a key enabler of making it easier for customers to do business with us. We
are developing a deeper understanding of the customer journey across each of our businesses in order to deliver inspired products and frictionless
customer experiences. We are investing in data, analytics, and digital marketing capabilities to help us develop a holistic view of our customers
and become even more consumer-centric in our innovation efforts. Finally, we’re working hard to strengthen our core technology infrastructure
in support of our digital transformation efforts.
We are working to ensure our brands are fully social media-optimized, which will help us drive end-to-end engagement throughout the customer
journey while personalizing the experience to foster brand loyalty. We’re also leveraging the success of our new visualization tool for our North
America workplace designers into our International markets to provide our dealers with world-class capabilities to help our end customers
discover, navigate, and select from our entire portfolio of products.
Accelerate Profitable Growth
We see clear opportunities for profitable growth across our business segments. In fact, we believe we are the only player in our space with
meaningful access to both global contract and global retail growth opportunities, and we aim to strengthen and evolve them both.
In North America, we have integrated our Specialty business into our North America Contract business. Bringing these businesses together
better aligns our sales teams and makes it easier for our dealers and our customers to access our entire product portfolio. Ultimately, we believe
this combination will help us capture a greater share of our dealer and end customer business. Additionally, our North America profit improvement
initiative is playing a key role in accelerating profitable growth in this business. We’re expecting to achieve $30 million to $40 million in run-rate
savings from this initiative by the end of fiscal year 2020 and are starting to leverage these learnings across the rest of our businesses as well.
With our fast-growing retail business representing 15% of our revenue, we’re actively working on making the Design Within Reach offering more
available across North America, while also scaling the HAY brand across our retail footprint. We’re enhancing our direct-to-consumer capabilities
with new digital tools in our Studios and online, and we are moving to a new state-of-the-art distribution center to improve our customer delivery
experience.
Finally, with sales growth of 13% in fiscal year 2019, we see continued opportunity for our International business to build on its momentum and
continue driving profitable growth. To help accelerate that growth, we plan to continue expanding our dealer distribution network, enter new
product categories, grow our ancillary offering, and better align our global accounts team to enhance our ability to serve our largest global
customers.
Reinforce Our Commitment to Our People, Planet, Communities
On the heels of our 12th consecutive year of inclusion on the Human Rights Campaign Corporate Equality Index, we believe now is the right
time to reinforce our commitment to our people, our planet, and our communities in a more integrated and deliberate way than ever before.
We’ll focus on building, developing, and retaining world-class talent, shaping an inclusive and diverse workforce, and elevating our commitment
to sustainability. Beyond simply being the right thing to do, we are confident that elevating our focus on social and environmental business
practices will positively impact our customers and enhance returns for our shareholders over the long term.
With distinct and differentiated sources of competitive advantage, clear strategic priorities, and a strong track record of financial performance,
we have a winning foundation for our future. Our product library, innovation capabilities and design processes, world-class talent, global scale,
and omnichannel reach give us a leg up in a world that’s constantly changing. I’m confident that our vision for the future will enable us to provide
our customers with the most innovative and inspiring solutions wherever they work, live, heal, and learn.
In closing, I want to thank all of our employees for their tremendous effort this year in delivering these results. We are excited to build on this
momentum as we execute against our strategy.
Thank you for your continued support of Herman Miller.
Sincerely,
Andrea R. Owen
President and Chief Executive Officer
(1) Non-GAAP measurements; see accompanying reconciliations and explanations on pg. 48.
Notice of Annual Meeting of Shareholders of Herman Miller, Inc.
The Annual Meeting of the Shareholders of Herman Miller, Inc. will be held virtually on October 14, 2019, beginning promptly at 11:00 a.m., ET.
Shareholders will be able to listen, vote, and submit questions from any remote location that has Internet connectivity. There will be no physical
location for shareholders to attend. Shareholders may participate online by logging in at www.virtualshareholdermeeting.com/MLHR19 and
entering the 16-digit control number included on your notice of Internet availability of the proxy materials, on your proxy card, or on the instructions
that accompanied your proxy materials.
Items of Business:
1. To elect three director nominees, each for a term of three years.
2. To ratify the Audit Committee's selection of KPMG LLP as Herman Miller's independent registered public accounting firm for fiscal year
2020.
3. To vote, on an advisory basis, to approve the annual compensation of the Named Executive Officers.
4. To transact such other business as may properly come before the meeting or any adjournment thereof.
Shareholders of record at the close of business on August 16, 2019, will be eligible to vote at this year's annual meeting.
Please note that this year's Annual Shareholders' Meeting will be held via the Internet only. Herman Miller's accompanying proxy materials
include instructions on how to participate in the meeting and the means by which you may vote your shares of company stock.
We encourage each shareholder to vote at your earliest convenience, by one of the following means:
By visiting www.proxyvote.com on the Internet
And if you require paper materials:
By calling (within the U.S. or Canada) toll free at 1-800-690-6903; or
By signing and returning your Proxy card
You may also vote at the meeting via the internet by visiting www.virtualshareholdermeeting.com/MLHR19 and following the instructions.
Regardless of whether you expect to attend the meeting through the Internet, please vote your shares in one of the ways listed above.
By order of the Board of Directors
Jacqueline H. Rice, General Counsel and Acting Secretary
September 3, 2019
Herman Miller, Inc., and Subsidiaries 3
Table of Contents
Solicitation of Proxies and Voting (Q&A)
Financial Highlights from 2019
Proposal #1 - Election of Directors
Corporate Governance and Board Matters
Board Committees
Proposal #2 - Ratification of Audit Committee's selection of Independent Registered Public Accounting Firm
Report of the Audit Committee
Proposal #3 - Proposal to Approve, on an Advisory Basis, the Annual Compensation Paid to the Company's Named
Executive Officers
Voting Securities and Principal Shareholders
Director and Executive Officer Information
Letter from Board Executive Compensation Committee Chair
Compensation Discussion and Analysis
Executive Compensation Committee Report
Summary Compensation Table
Grants of Plan-Based Awards
Outstanding Equity Awards at Fiscal Year-End
Option Exercises and Stock Vested
Pension Benefit
Nonqualified Deferred Compensation
Potential Payments upon Termination, Death, Disability, Retirement or Change in Control
Pay Ratio
Director Compensation
Equity Compensation Plan Information
Section 16(a) Beneficial Ownership Reporting Compliance
Certain Relationships and Related Party Transactions
Reconciliation of Non-GAAP Financial Measures
Miscellaneous
Page No.
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50
4 2019 Proxy Statement
Herman Miller, Inc.
855 East Main Avenue
PO Box 302
Zeeland, Michigan 49464-0302
Proxy Statement Dated September 3, 2019
This Proxy Statement and the accompanying Proxy, which we are making available to shareholders on or about September 3, 2019, are furnished
to the shareholders of Herman Miller, Inc. in connection with the solicitation by the Board of Directors of proxies to be used at the Annual Meeting
of Shareholders. This meeting will be held on October 14, 2019, at 11:00 a.m., ET. Please note that this year's Annual Meeting will once again
be held via the Internet rather than in person.
What is a proxy?
A proxy is your authorization for someone else to vote your shares for you in the way that you want to vote and allows you to be represented
at our Annual Meeting if you are unable to attend the meeting. When you complete and submit a proxy card or use the automated telephone
voting system or the Internet voting system, you are submitting a proxy. As used in this Proxy Statement, the terms “the Company,” “we,” “our”
and “us” all refer to Herman Miller, Inc. and its subsidiaries.
What is a Proxy Statement?
A Proxy Statement is a document the United States Securities and Exchange Commission (“SEC”) requires to explain the matters on which
we are asking you to vote at our Annual Meeting by proxy and to disclose certain information that may be helpful to you in deciding how to
vote. This Proxy Statement was first made available to the shareholders on or about September 3, 2019.
Why am I receiving my proxy materials electronically instead of receiving paper copies through the mail?
We are furnishing proxy materials to our shareholders primarily via the Internet, instead of mailing printed copies of the Proxy Statement and
Annual Report. This supports our ongoing commitment to sustainability by reducing the amount of paper needed to circulate the proxy materials
and at the same time reducing our costs associated with mailing the proxy materials to shareholders.
On or about September 3, 2019, we mailed to our shareholders of record (other than those who previously requested electronic delivery) a
Notice of Internet Availability of Proxy Materials containing instructions on how to access this Proxy Statement and our Annual Report online.
If you received a Notice of Internet Availability of Proxy Materials by mail, you will not receive a printed copy of the proxy materials in the mail.
The Notice of Internet Availability of Proxy Materials instructs you on how to electronically access and review all information contained in this
Proxy Statement and the Annual Report, and it provides you with information on voting.
If you received a Notice of Internet Availability of Proxy Materials by mail and would like to receive a paper copy of our proxy materials, follow
the instructions contained in the Notice of Internet Availability of Proxy Materials about how you may request to receive your materials in printed
form on a one-time or ongoing basis.
Where is this year’s Proxy Statement available electronically?
You may view this Proxy Statement and the 2019 Annual Report electronically by going to https://www.hermanmiller.com/investors/annual-
reports/.
Who can vote?
Only record holders of our common stock at the close of business on August 16, 2019 can vote at the Annual Meeting. We refer to that date
as the Record Date for the meeting. Each shareholder of record has one vote, for each share of common stock owned, on each matter presented
for a vote at the Annual Meeting.
What is the difference between a shareholder of record and a “street name” holder?
If your shares are registered directly in your name on the records of our transfer agent, then you are the shareholder of record with respect
to those shares.
If your shares are held in a stock brokerage account or by a bank or other nominee, then the brokerage firm, bank or other nominee is considered
to be the shareholder of record with respect to those shares. However, you still are considered the beneficial owner of those shares, and your
shares are said to be held in “street name.” Street name holders generally cannot vote their shares directly and must instead instruct the
brokerage firm, bank or other nominee how to vote their shares. See “How can I vote?” below.
Herman Miller, Inc., and Subsidiaries 5
How can I vote?
If your shares are held in “street name,” follow the instructions provided by your brokerage firm, bank, or other nominee. If your shares are
registered directly in your name on our records, you can vote in one of four ways:
•
•
•
•
Via Internet before the Annual Meeting: Go to www.proxyvote.com and follow the instructions. You may do this at your convenience,
24 hours a day, 7 days a week. You will need to have your proxy card or Notice of Internet Availability of Proxy Materials in hand.
The deadline for Internet voting is 11:59 p.m., Eastern Time, October 13, 2019.
By Telephone: If you have requested paper materials, call toll-free 1-800-690-6903 and follow the instructions. You may do this at
your convenience, 24 hours a day, 7 days a week. You will need to have your proxy card or Notice of Internet Availability of Proxy
Materials in hand. The deadline for voting by phone is 11:59 p.m., Eastern Time, October 13, 2019.
In Writing: If you received a proxy card, complete, sign, and date the proxy card and return it in the return envelope that we provided
with your proxy card.
At the Annual Meeting: Log on to the Internet at www.virtualshareholdermeeting.com/MLHR19. At this site, you will be able to vote
electronically. You will also be able to submit questions.
If you submit a proxy to the Company before the Annual Meeting, whether by proxy card, by telephone or by Internet, the persons named as
proxies will vote your shares as you direct. If no instructions are specified, the proxy will be voted for the three directors nominated by the Board
of Directors; for the ratification of the appointment of KPMG LLP as the Company’s independent registered public accounting firm for the fiscal
year ending May 30, 2020; and for the non-binding advisory proposal to approve the compensation of our Named Executive Officers.
Can I revoke my proxy?
You may revoke a proxy at any time before the proxy is exercised by:
(1) delivering written notice of revocation to the Corporate Secretary of the Company, 855 East Main Street, P.O. Box 302, Zeeland, Michigan
49464-0302;
(2) submitting another properly completed proxy card that is later dated;
(3) voting by telephone at a subsequent time;
(4) voting via the Internet at a subsequent time; or
(5) voting at the Annual Meeting.
If you hold your shares in “street name,” you must vote your shares in the manner that your brokerage firm, bank or other nominee has
prescribed.
How many votes do we need to hold the Annual Meeting?
To carry on the business of the meeting, we must have a quorum. This means that at least a majority of the shares that are outstanding and
entitled to vote as of the Record Date must be in attendance at the virtual meeting or by proxy.
Shares are counted as in attendance at the meeting if the shareholder has either:
•
•
submitted a signed proxy card or other form of proxy (through the telephone or Internet); or
logged into the virtual meeting using their 16-digit control number and votes electronically during meeting.
On the Record Date, there were 59,054,301 shares of common stock issued and outstanding. Therefore, at least 29,527,151 shares need to
be present at the Annual Meeting.
What matters will be voted on at the meeting?
We are asking you to vote on: (i) the election of three directors to serve three-year terms expiring in 2022; (ii) the ratification of the appointment
of KPMG LLP as our independent registered public accounting firm for the fiscal year ending May 30, 2020; and (iii) a non-binding advisory
proposal on the compensation of our Named Executive Officers, otherwise known as a “say-on-pay” proposal. We describe these matters more
fully in this Proxy Statement.
How many votes are needed for each proposal?
A majority of votes cast at the meeting will approve each matter that arises at the Annual Meeting. Under the Company’s majority vote standard
for the election of directors (included in the Company’s Bylaws and described in more detail below), in order to be elected, a nominee must
receive a greater number of votes cast “for” his or her election than the number of votes “withheld” with respect to that director’s election. Because
the “say-on-pay” vote is advisory, it will not be binding upon the Board of Directors or the Executive Compensation Committee of the Board.
6 2019 Proxy Statement
What happens if a nominee is unable to stand for re-election?
The Board may, by resolution, provide for a lesser number of directors or designate a substitute nominee. In the latter case, shares represented
by proxies may be voted for a substitute nominee. Proxies cannot be voted for more than three nominees. We have no reason to believe any
nominee will be unable to stand for re-election.
What alternatives do I have in voting on each of the proposals?
Except with respect to the election of directors, you may vote “for,” “against,” or “abstain” on each proposal. In the election of directors, you may
vote “for” or “withhold authority to vote for” each nominee.
How can I participate in the Virtual Annual Meeting?
You may attend and participate in the Annual Meeting by logging onto the Internet at www.virtualshareholdermeeting.com/MLHR19. At this site,
you will be able to vote electronically and submit questions during the meeting. You will need the 16-digit control number that you received with
your proxy card or Notice of Internet Availability to enter and attend the meeting.
How can I ask questions during the Virtual Annual Meeting?
If you wish to submit a question, shareholders may do so by logging-in to the virtual meeting platform at www.virtualshareholdermeeting.com/
MLHR19, entering your 16-digit control number, then typing your question into the ‘‘Ask a Question’' field, and then click ‘‘Submit’’. Questions
pertinent to meeting matters will be answered during the meeting, subject to time constraints. Inappropriate questions including those not
pertinent to the meeting matters, relating to non-public material information, relating to pending litigation, or not otherwise suitable for the conduct
of the Annual Meeting will not be addressed. Any questions pertinent to meeting matters, including those that cannot be answered during the
meeting due to time constraints, will be posted online and answered at http://investors.hermanmiller.com/. The questions and answers, including
those that cannot be answered during the meeting due to time constraints, will be available as soon as practical after the meeting at our Investor
Relations website.
How can I get help with technical support during the virtual meeting?
We will have technicians available to assist you with any technical difficulties you may have accessing the virtual meeting. For any technical
assistance needed while participating in the Annual Meeting of Shareholders please contact our virtual meeting service provider at
855-449-0991 (US) or 720-378-5962 (International).
Where do I find the voting results of the meeting?
If available, we will announce voting results at the Annual Meeting. We will also disclose the voting results on a Current Report on Form 8-K
that we will file with the SEC within four business days after the meeting.
Important Notice Regarding the Availability of Proxy Materials for the Shareholders Meeting to be Held on October 14, 2019
This Proxy Statement along with our Annual Report are available at https://www.hermanmiller.com/investors/annual-reports/. You may obtain a
copy of the Company’s Annual Report on Form 10-K for the fiscal year ended June 1, 2019, as filed with the SEC, without charge upon written
request to the Corporate Secretary of the Company, Herman Miller, Inc., 855 East Main Street, P.O. Box 302, Zeeland, Michigan 49464-0302.
Herman Miller, Inc., and Subsidiaries 7
Financial Highlights from Fiscal 2019
Company Performance
Net sales increased in fiscal year 2019 to $2,567.2 million, an increase of 7.8% from the prior fiscal year and a record level of sales for the
Company. On an organic basis, which adjusts for changes in foreign currency translation rates, net sales increased by 7.1%(1) compared to last
fiscal year. Each of our business segments delivered sales growth over last year, led by double digit organic growth in the International Contract
and Retail segments during the year.
Excluding approximately 60 basis points of impact from adopting new revenue recognition rules at the start of our current fiscal year, gross
margin increased ten basis points over the prior year. Manufacturing production leverage from higher shipments volumes and benefits from our
profit improvement initiatives helped offset the challenge of inflationary pressures on key commodities and the impact of trade tariffs throughout
most of the year. Operating expenses were also well-controlled during the year. These factors combined to deliver operating margin expansion
over the prior year of 40 basis points on a reported basis and 50(1) basis points on an adjusted basis. Consolidated diluted earnings per share
of $2.70 and adjusted diluted earnings per share of $2.97(1) increased meaningfully compared to prior year diluted earnings per share of $2.12
and adjusted diluted earnings per share of $2.30(1), respectively. Operating cash flow generation of $216 million for the year increased by $50
million over the prior year and enabled the Company to fund capital expenditures supporting the business, repurchase $48 million of company
shares and, subsequent to the end of the fiscal year, announce a 6% increase in the quarterly dividend to $0.21 per share, the highest quarterly
rate in Herman Miller's history.
Behind a supportive industry environment and continued traction from our strategic initiatives and new product launches, the North America
Contract business segment delivered reported sales growth of 6.1% and organic growth of 4.8%(1) compared to the prior fiscal year. We made
meaningful investments in design and innovation during the year, launching a full slate of new products and services aimed at delivering high-
performing work spaces that meet our customers’ evolving needs.
The International Contract segment recorded an increase in net sales of 13.3% for the year. The improvement in net sales reflected growth
across each of our geographic regions of EMEA, Asia-Pacific and Latin America. This sales growth leveraged a powerful combination of broad
and expanding dealer distribution, new products tuned to the needs of the market and a talented sales organization.
Our Retail segment reported another year of strong momentum with net sales growth of 8.9% on a reported basis and up 10.5%(1) over last
year on an organic basis. Growth was delivered from multiple channels this year, including eight new Design Within Reach studios, contract
channel growth, eCommerce and the launch of the HAY brand in North America. While real estate expansion and other investments to support
long-term growth in the Retail business have limited near-term profitability, these investments are driving top-line momentum and positioning
us for operating margin expansion as we scale the Retail segment.
(1) Non-GAAP measurements; see accompanying reconciliations and explanations on pg. 48.
8 2019 Proxy Statement
Proposal #1 - Election of Directors
The Board of Directors of the company has nominated Lisa A. Kro, Michael C. Smith, and Michael A. Volkema for election as directors. All
nominees would serve until the 2022 annual meeting. Ms. Kro and Mr. Volkema are now serving as a director and have previously been elected
as a director by our shareholders. Mr. Smith was appointed to the Board of Directors on January 16, 2019. The Board approved each of the
nominees following the recommendation of our Nominating and Governance Committee.
We include more information about the nominees and the directors who will continue in office following the Annual Meeting below. Unless
otherwise directed by a shareholder’s proxy, the persons named as proxy holders in the accompanying proxy will vote for the nominees named
above. If any of the nominees becomes unavailable, which we do not anticipate, then the Board of Directors, at its discretion, may designate
substitute nominees, in which event your proxy will be voted for such substituted nominees unless you have withheld authority to vote for
directors. Shares cannot be voted for a greater number of people than the number of nominees named.
Our Bylaws provide that each director will be elected by the majority of the votes cast with respect to that director’s election at any meeting of
shareholders for the election of directors, other than a contested election. A majority of the votes cast means that the number of votes cast “for”
a director’s election exceeds the number of votes “withheld” with respect to that director’s election. In a contested election, each director will be
elected by a plurality of the votes cast with respect to that director’s election at the meeting. An election is considered contested if the number
of nominees exceeds the number of directors to be elected at that meeting.
In an uncontested election of directors, any nominee for director who is already serving as a director and receives a greater number of votes
“withheld” from his or her election than votes “for” his or her election (a “Majority Against Vote”) is required to promptly tender his or her resignation.
Abstentions and broker non-votes are not counted as votes cast either “for” or “withheld” with respect to that director’s election. The Nominating
and Governance Committee of the Board will then promptly consider the resignation submitted by a director receiving a Majority Against Vote,
and that Committee will recommend to the Board whether to accept the tendered resignation or reject it.
The Board will act on the Committee’s recommendation no later than 90 days following the date of the shareholders’ meeting at which the
election occurred. In considering the Committee’s recommendation, the Board will consider the factors considered by the Committee and such
additional information and factors the Board believes to be relevant. We will promptly publicly disclose the Board’s decision whether to accept
the resignation as tendered, including a full explanation of the process by which the decision was reached and, if applicable, the reasons for
rejecting the tendered resignation. Any director who tenders a resignation pursuant to those procedures may not participate in the Committee
recommendation or the Board consideration regarding whether to accept the tendered resignation.
The Board of Directors currently consists of ten directors, nine of whom are independent. The maximum number of directors for the Board is
thirteen. Our Bylaws require that directors be divided into three classes, each class to be as nearly equal in number as possible. Members of
each class hold office until the third succeeding annual meeting following their election and until their successors are duly elected and qualified
or until their removal or resignation.
The Board of Directors recommends a vote FOR the election of each person nominated by the Board.
Herman Miller, Inc., and Subsidiaries 9
Information about the Nominees and Directors
Certain information with respect to the nominees for election at Annual Meeting, as well as each of the other Directors, is set forth below and
on the following pages, including their names, ages, a brief description of their recent business experience, including present occupations and
employment, certain directorships that each person held during the last five years, and the year in which each person became a Director of the
company. We also include additional information below and on the following pages about each Director describing some of the specific
experiences, qualifications, attributes or skills that each Director possesses which the Board believes has prepared them to be effective Directors.
Name and Age
Lisa A. Kro, 54
Year First
Became
a Director
2012
Nominees for Election as Directors for Term to Expire in 2022
Principal Occupation(s) During Past 5 years
Other Directorships of Public Companies
held during Past 5 years
Chief Financial and Administrative Officer
Ryan Companies since 2019
Co-Founder, Managing Director
Mill City Capital L.P. 2010 to 2018
None
Ms. Kro is the Chief Financial and Administrative Officer at Ryan Companies, a national real estate services company. From 2010-2018 she co-founded and
was Managing Director at the private equity firm Mill City Capital. From 2004 to 2010, Ms. Kro was the Chief Financial Officer and a Managing Director of
Goldner Hawn Johnson & Morrison, also a private equity firm. Prior to joining Goldner Hawn, she was a partner at KPMG LLP, an international public accounting
firm.
Ms. Kro's service in auditing as well as her experience in the finance and capital environments enable her to contribute to a number of financial and strategic
areas of the company. Her experience on other boards, including previous service as the financial expert on the audit committee of another publicly-traded
company, contributes to the oversight of the company's financial accounting controls and reporting.
Michael C. Smith, 49
2019
President and Chief Operating Officer, Stitch Fix, Inc.
since 2012
None
Mr. Smith is the President and Chief Operating Officer of Stitch Fix, an online personal styling platform with more than 2.9 million clients. Mr. Smith has been
an innovative leader in the digital and fast-paced online consumer sectors for more than 15 years, with leadership positions in ecommerce, operations,
customer experience, and finance. He joined Stitch Fix in 2012 and was instrumental in helping to scale the business from a small start-up to the innovative
public company it is today. Mr. Smith leads all operations for the company, including the Styling, Merchandising, and Customer Experience Teams.
Mr. Smith's expertise and passion for building smart, efficient, and customer-centric online experiences will help us improve our customer experience initiatives
and growth of our global businesses.
Michael A. Volkema, 63
1995
Chairman of the Board, Herman Miller, Inc.
since 2000
Wolverine Worldwide, Inc.
Mr. Volkema has been Chairman of the Board of Directors of Herman Miller, Inc. since 2000, serving as non-executive Chairman since 2004. He also served
as CEO and President of the company from 1995 to 2004. Mr. Volkema has more than thirty years of experience as a senior executive in the home and
office furnishings industry. This experience includes corporate leadership, branded marketing, international operations, and public company finance and
accounting through audit committee service.
Mr. Volkema is a key contributor to the Board based upon his knowledge of the company's history and culture, operational experience, board governance
knowledge, service on boards of other publicly held companies and industry experience.
10 2019 Proxy Statement
Name and Age
Year First
Became
a Director
Mary Vermeer Andringa, 69
1999
Directors Whose Terms Expire in 2020
Principal Occupation(s) During Past 5 years
Chair of the Board
Vermeer Corporation since 2015
Chief Executive Officer and Chair of the Board
Vermeer Corporation from 2014 to 2015
President and Chief Executive Officer
Vermeer Corporation from 2003 to 2014
Other Directorships of Public Companies
held during Past 5 years
None
Since 1989, Ms. Andringa has been an executive officer of Vermeer Corporation, a leading manufacturer of agricultural, construction, environmental and
industrial equipment located in Pella, Iowa. She served as President and Chief Executive Officer of Vermeer from 2003 to 2014. At that time, she became
Chief Executive Officer and Chair of the Board. She transitioned exclusively to Chair of the Board in 2015. Ms. Andringa's tenure with Vermeer has spanned
the gamut of functional expertise from marketing to international sales and acquisitions. With over thirty years of manufacturing experience, Ms. Andringa
is past Chair of the National Association of Manufacturers which represents over 14,000 U.S.-based manufacturing entities. Ms. Andringa served the last
four years as the co-chair for the B20 Task Force for Small and Medium Enterprises. The B20 is a group of business leaders from the G20 countries who
develop and advise the political leaders for the G20 on proposals to improve global growth.
Ms. Andringa's experience as a chief executive officer coupled with her focused efforts on lean manufacturing and continuous improvement initiatives, as
well as her involvement in international product sales and distribution, provide an important resource to management and the Board of Directors.
J. Barry Griswell, 70
2004
Retired President and CEO, Community Foundation of Greater
Des Moines 2008 to 2013
Voya Financial Inc.
Och-Ziff Capital Management Group
Mr. Griswell is the retired chairman and chief executive officer of the Principal Financial Group and Principal Life, a global financial services provider which
offers a wide range of insurance and financial products and services. With more than thirty years of financial services experience, Mr. Griswell was the
president and CEO of MetLife Marketing Corporation prior to joining The Principal. He is a former director and non-executive chairman of the board of the
Principal Financial Group. Mr. Griswell is a director of Voya Financial, where he serves on the Executive Committee and as chair of the Risk, Investment and
Finance Committee.
Mr. Griswell's financial expertise, governance experience and service as an executive of a publicly-traded corporation make him a key contributor to the Board
of Directors.
Andrea R. Owen, 54
2018
President and Chief Executive Officer
Herman Miller, Inc. since 2018
Global President, Banana Republic 2014 to 2017
Executive Vice President GAP Global Outlet
2010 to 2014
Taylor Morrison Home Corporation
Ms. Owen serves as the Company’s President and Chief Executive Officer, effective as of August 22, 2018. Prior to joining Herman Miller, she served a 25-
year career at Gap Inc., where she most recently acted as Global President of Banana Republic, leading 11,000 employees in over 600 stores across 27
countries.
Ms. Owen is the only member of Company management on the Board of Directors. She has developed a diversified skill set that aligns with the strategic
direction of Herman Miller today and ranges from digital and omni-channel transformation to design, development and supply chain management, making
her an important contributor to the Board.
Herman Miller, Inc., and Subsidiaries 11
Name and Age
Year First
Became
a Director
David A. Brandon, 67
2011
Directors Whose Terms Expire in 2021
Principal Occupation(s) During Past 5 years
Chairman and CEO, Toys "R" Us, Inc.
2015 to 2018
Director of Intercollegiate Athletics, University of Michigan
2010 to 2014
Other Directorships of Public Companies
held during Past 5 years
Domino's Pizza, Inc.
DTE Energy Company
Mr. Brandon is the former Chairman and Chief Executive Officer of Toys "R" Us, Inc., a retailer of toys and juvenile products. Mr. Brandon joined Toys "R"
Us in 2015 and officially left the company in May 2018. On September 18, 2017, Toys "R" Us filed a voluntary petition for relief under the United States
Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of Virginia (Richmond Division). Mr. Brandon served as the Director of
Intercollegiate Athletics at the University of Michigan from 2010 to 2014. Prior to that, he served as Chairman and Chief Executive Officer of Domino's Pizza,
Inc., an international pizza delivery company operating over 9,000 stores in over 60 countries. Mr. Brandon was also President and Chief Executive Officer
of Valassis, Inc. from 1989 to 1998 and Chairman of its Board of Directors from 1997 to 1998.
Mr. Brandon's years of experience as a chief executive officer of several publicly-traded companies, his experience in global brand management and his
for-profit and non-profit board service bring a unique perspective to the Board of Directors.
Douglas D. French, 65
2002
Managing Director, Santé Health Ventures
since 2007
None
Mr. French has served as the founding partner of Santé Health Ventures, an early-stage healthcare venture fund, since 2007. Prior to joining Santé Health
Ventures, he served as the President and Chief Executive Officer of Ascension Health, the largest not-for-profit health system in the U.S. Mr. French has
also served as CEO for St. Mary's Medical Center and St. Vincent Health System, both of Midwest Indiana. He has more than three decades of health
management experience including serving as a director for numerous public and private companies.
Mr. French's governance experience, as well as his leadership roles and expertise in the health management industry, provides a valuable resource to
management.
John R. Hoke III, 54
2005
Chief Design Officer, Nike, Inc.
since 2017
Vice President, Nike Global Design 2010 to 2017
None
Since joining Nike, Inc., a marketer of athletic footwear, apparel, equipment, accessories and services, in 1993, Mr. Hoke has led the communication of Nike's
culture of creativity internally and externally. He is currently the Chief Design Officer of Nike, Inc. having previously served as Vice President of Global Design,
inspiring and overseeing an international team of designers. Mr. Hoke also serves as a director to several not-for-profit organizations relating to art and design.
Mr. Hoke's design expertise, both domestically and internationally, including his leadership role in a major, global enterprise, brings additional, insightful
perspective to our Board of directors.
Heidi J. Manheimer, 56
2014
Executive Chairman, Surratt Cosmetics LLC
since December 2017
Independent Consultant 2015 to 2017
Chief Executive Officer, Shiseido Cosmetics America
from 2006 to 2015
None
Ms. Manheimer is the Executive Chairman of Surratt Cosmetics LLC, a customizable beauty products and cosmetics company. Ms. Manheimer served as
the Chief Executive Officer of Shiseido Cosmetics America, a global leader in skincare and cosmetics, from 2006 to 2015, as President of U.S. Operations
from 2002 to 2006 and as Executive Vice President and General Manager from 2000 to 2002. Prior to that she spent seven years at Barney's New York and
seven years at Bloomingdales in the beauty care divisions, rising to senior leadership positions within each company. Ms. Manheimer currently sits on the
Board of Directors of Burton Snowboards having been appointed in 2006. For many years, she has served on nonprofit and trade association boards, and
she was elected Chairwoman of the Cosmetic Executive Women Foundation in 2014.
Ms. Manheimer’s extensive experience as a senior executive in the retail industry, experience with both e-commerce and international business practices
and service as a board member for both profit and nonprofit businesses provide a valuable resource to management and the Board of Directors.
The Nominating and Governance Committee has not received any nominations from any of our shareholders in connection with our 2019 Annual
Meeting.
12 2019 Proxy Statement
Corporate Governance and Board Matters
Board Governance Guidelines
Our Board of Directors is committed to sound and effective corporate governance practices, strong oversight of corporate risk management,
ethical conduct and compensation. These practices reflect the Board's long-standing philosophy that a proper structure, appropriate policies
and procedures, and reflective cultural factors provide the cornerstone to good governance. The Board documented those practices by adopting
our Board Governance Guidelines ("Guidelines"). These Guidelines address director responsibilities, the composition of the Board, required
Board meetings and materials, Board committee composition and responsibilities, and other corporate governance matters. Under our Guidelines,
a majority of the members of our Board must qualify as independent under the listing standards of the NASDAQ National Markets. Our Guidelines
also require the Board to have, among other committees, an Audit Committee, an Executive Compensation Committee, and a Nominating and
Governance Committee, and that each member of those Committees qualifies as an independent director under the NASDAQ listing standards.
Our Guidelines, as well as the charters of each of the foregoing Committees, are available for review on our website at www.hermanmiller.com/
governance.
Leadership Structure
The Guidelines, with respect to the position of Chief Executive Officer (“CEO”) and Chairperson, state that “the Board believes the roles of CEO
and Chairperson should normally be separated. If the positions are combined, the Board will closely monitor the performance and working
relationship between the CEO/Chairperson and the Board and will establish a Lead Director to act as a liaison between directors and the CEO/
Chairperson and who chairs meetings of the independent directors.” Consistent with our Guidelines, the roles of CEO and Chairperson are
currently separate. Mr. Volkema currently serves as Chairman of the Board. As Mr. Volkema is not an employee of the Company, he serves as
a non-executive Chairman.
The Board's Role in Risk Oversight
The Company's management annually engages in an enterprise risk management process, the key output of which is a series of risk matrices
intended to identify and categorize strategic risks. The matrices also identify (1) those members of senior management who are responsible for
monitoring each major risk, and (2) whether that risk is reviewed by the Board or a committee of the Board. The development of the matrices
is facilitated by the Company's Business Risk Group, through discussions with executive and senior management. Management and the Business
Risk Group annually review and discuss the risk assessment process and results with the Audit Committee and, if applicable, recommend what
risks are being adequately addressed, directly or indirectly, on a regular basis and what risks should be further discussed with the full Board or
other committees and the appropriate form and timing of such discussions. The Business Risk Group is the internal audit group of the Company.
During the past fiscal year, the Business Risk Group reviewed the Company's compensation policies and practices to determine if those policies
or practices are reasonably likely to have a material adverse impact on the Company. The Business Risk Group conducted its review in late
2018 and provided a report to the Audit Committee in January 2019. In conducting its review of the compensation plans, the Committee considered
both the structure of the compensation plans and the presence of risk mitigating features such as caps, multi-year earning requirements, vesting
provisions and “clawbacks.” Based on the evaluation, the Committee concurs with management's determination that the Company's
compensation policies and practices are not reasonably likely to create a material adverse impact on the Company.
Under the Guidelines, the Board of Directors is responsible for evaluating CEO performance, monitoring succession planning, reviewing the
Company's major financial objectives, evaluating whether the business is being properly managed and overseeing the processes for maintaining
the integrity of the Company with respect to its financial statements, public disclosures and compliance with laws. The Board has delegated the
primary oversight for managing the risk with respect to some of these to various board committees as described in the committee charters.
Code of Conduct
Our Board has adopted a Code of Conduct that applies to all our employees, officers, and directors. This code also serves as the code of ethics
for our CEO and senior financial officers. This code is posted on our website at http://www.hermanmiller.com/legal/corporate-code-of-
conduct.html. Any changes to or waivers of the code must be approved by the Board of Directors and will be disclosed on the Company's
website. The Code of Conduct was last materially modified in December 2015. The Code of Conduct is reviewed annually, there were no
modifications to or waivers of the code in fiscal 2019. The Code of Conduct meets the requirements of the NASDAQ listing standards.
Determination of Independence of Board Members
As required by our Guidelines, our Board has determined that each of our directors, other than Ms. Owen, qualifies as an “Independent Director,”
as such term is defined in the NASDAQ listing standards, and that none of those independent directors has a material relationship with the
Company. The Board's determination was made as a result of its review of completed individual questionnaires addressing the nature and extent
of each member's relationship with the company and taking into consideration the definition of “Independent Director” under the NASDAQ rules.
Herman Miller, Inc., and Subsidiaries 13
Corporate Governance and Board Matters (continued)
Our Board also determined that each member of the Audit Committee and Executive Compensation Committee meets the independence
requirements applicable to those committees as prescribed by the NASDAQ listing standards and, as to the Audit Committee, the applicable
rules of the SEC.
Meeting Attendance
Each of our directors is expected to attend all meetings of the Board and applicable committee meetings, and Directors are encouraged to join
the webcast for the Annual Meeting. All of our then current directors did so for our 2018 Annual Shareholders Meeting. During fiscal 2019, the
Board held four meetings; each director attended at least 75 percent of the aggregate number of meetings of our Board and Board Committees
on which they served. Consistent with the requirements of our Guidelines, the independent members of our Board met in executive sessions,
without the presence of management, at the conclusion of each regularly scheduled Board meeting.
Communications with the Board
Shareholders and other parties interested in communicating directly with one or more of our directors may do so by writing to us, c/o Corporate
Secretary, 855 East Main Avenue, PO Box 302, Zeeland, Michigan 49464-0302. The Corporate Secretary will forward all relevant correspondence
to the director or directors to whom the communication is directed.
Director Nominations
Our Bylaws contain certain procedural requirements applicable to shareholder nominations of directors. Shareholders may nominate a person
to serve as a director if they provide written notice to us not earlier than the close of business on the 120th day and not later than the close of
business on the 90th day prior to the first anniversary of the preceding year's Annual Meeting of Shareholders and, with respect to any special
meeting of shareholders, not later than the close of business on the 10th day following the date on which the meeting is first publicly announced
or, if there is no announcement, the 10th day following the date on which the notice of that meeting was first sent to our shareholders. The notice
must include (1) the name and address of the shareholder providing notice and of the person or persons nominated, including information on
the securities of the company held by those individuals, including any derivative securities, the details of which are set forth in our Bylaws, (2)
a representation that the shareholder is a current record holder and will continue to hold those shares through the date of the meeting and
intends to attend the meeting in person or by proxy, (3) for each proposed nominee, (a) all information relating to that person that would be
required to be disclosed in a Proxy Statement required to be made in connection with solicitations or proxies for election of directors in a contested
election pursuant to Section 14 of the Securities and Exchange Act of 1934 (including that person's written consent to be named in the Proxy
Statement as a nominee and to serve as a director if elected) and (b) a description of all direct and indirect compensation and other material
monetary arrangements existing during the past three years, as well as any other material relationships between or among the shareholders
(and beneficial owner, if any) and their respective affiliates and associates and the proposed nominee and his or her respective affiliates and
associates, including all information required to be disclosed pursuant to Rule 404 under Regulation S-K, and (4) the completed and signed
questionnaire from each nominee with respect to the background and qualification of such person and the background of any other person or
entity on whose behalf the nomination is being made.
Our Nominating and Governance Committee is responsible for reviewing the qualifications and independence of the members of the Board. To
meet the needs of the company in a rapidly changing environment, the Guidelines explain that the company requires a high-performance board
of directors whose members subscribe to our values and meet the specific resource needs of the business. To that end, the Nominating and
Governance Committee considers a number of factors it deems appropriate when considering candidates for the Board; such factors may
include experience and knowledge of the company's history and culture, technical experience and backgrounds such as manufacturing, design,
marketing, technology, finance, management structure and philosophy, experience as a senior executive of a public company, and diversity.
The Nominating and Governance Committee may also consider experience in a variety of industries in annually assessing and reviewing the
current slate of directors and potential director candidates as the need arises. The Nominating and Governance Committee is responsible for
assessing the appropriate skills and characteristics required of Board members. These factors, and others as considered useful by the Nominating
and Governance Committee or the Board, are reviewed in the context of an assessment of the perceived needs of the Board at a particular
point in time.
A shareholder may also make a recommendation to the Nominating and Governance Committee regarding any individual that the shareholder
desires the Committee to consider for possible nomination as a candidate for election to the Board. The Board believes that all candidates,
including those that shareholders recommend, should be evaluated in the same manner.
Under our Bylaws and Governance Guidelines, no person may be elected as a director after he or she attains age 72, and a director who attains
age 72 while in office is required to tender his or her written resignation, which resignation shall be effective as of (or no later than) the annual
meeting of shareholders at or immediately after such person attains age 72.
14 2019 Proxy Statement
Board Committees
Our Board has four standing Committees. Committee responsibilities are detailed in written charters. These charters are available on our website
at www.hermanmiller.com/charters. The Committees are as follows:
Nominating and Governance Committee
We have a Nominating and Governance Committee comprised of Mary Vermeer Andringa (chair), John R. Hoke III, and Michael Volkema. The
Nominating and Governance Committee develops and recommends to the Board governance standards and policies and board compensation
including that of the Chairman of the Board. In addition, the Committee identifies and recommends to the Board candidates for election to the
Board. The Committee met five times during the last fiscal year.
Audit Committee
We have an Audit Committee comprised of Lisa A. Kro (chair), J. Barry Griswell, and Michael C. Smith. The Board has determined that Ms. Kro
is qualified as an “Audit Committee financial expert” within the meaning of the applicable SEC regulations. This Committee, composed entirely
of independent directors under the applicable listing standards of the NASDAQ listing requirements, as well as the requirements of the Sarbanes-
Oxley Act of 2002, is responsible for overseeing management's reporting practices, internal controls, and risk management on behalf of the
Board of Directors, including overseeing and regularly evaluating (quarterly) the company's cybersecurity risks, which is regularly reported to
and discussed among members of the Board of Directors. The committee is also responsible for appointing, approving the compensation of,
and overseeing our independent registered public accounting firm. The Audit Committee met nine times during the last fiscal year.
Executive Compensation Committee
We have an Executive Compensation Committee comprised of David A. Brandon (chair), Douglas D. French and Heidi J. Manheimer. The
Executive Compensation Committee recommends to the Board the annual executive incentive plan and the annual compensation of our Chief
Executive Officer and President, approves the annual compensation and executive incentive plan for the other executive officers, approves the
grants of employee equity awards, and acts as the administrative committee for our equity-based compensation plans. A description of the
committee's processes and procedures for the consideration and determination of executive and director compensation is set forth under the
caption “Compensation Discussion and Analysis - Executive Summary” below in this Proxy Statement. The committee met four times during
the last fiscal year.
Executive Committee
We have an Executive Committee comprised of Michael A. Volkema (chair), Mary Vermeer Andringa, David A. Brandon and Lisa A. Kro. The
Executive Committee acts from time to time on behalf of the Board in managing our business and affairs (except as limited by law or our Bylaws)
and is delegated certain assignments and functions by the Board of Directors. The committee met five times during the last fiscal year.
Executive Compensation Committee Interlocks and Insider Participation
No member of the Executive Compensation Committee is or has been an officer or employee of the company or had any relationship that is
required to be disclosed as a transaction with a related party except as noted under Certain Relationships and Related Party Transactions. In
addition, no current executive officer of the company has ever served as a member of the Board of Directors or compensation committee of any
other entity that has or has had one or more executive officers serving as a member of our Board of Directors or Executive Compensation
Committee.
Herman Miller, Inc., and Subsidiaries 15
Proposal #2 - Ratification of Audit Committee's selection of Independent Registered Public Accounting Firm
The Audit Committee of the Board completed a competitive process for purposes of selecting an audit firm to serve as the company’s independent
registered public accounting firm for the fiscal year ending May 30, 2020 (“Fiscal 2020”). As of May 6, 2019, the Audit Committee approved the
engagement of KPMG LLP (“KPMG”) as the company’s independent registered public accounting firm for purposes of auditing the company’s
financial statements effective June 2, 2019 for the 2020 fiscal year. This selection resulted in the dismissal of Ernst & Young LLP (“E&Y”), which
had served in that role, effective upon the filing of the company’s Annual Report on Form 10-K for the company’s fiscal year ended June 1, 2019.
The audit reports of E&Y on the consolidated financial statements of the company as of and for the fiscal years ended June 1, 2019, and June
2, 2018, did not contain an adverse opinion or a disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope, or
accounting principles. Representatives of E&Y are expected to be in attendance at our Annual Meeting of Shareholders to respond to appropriate
questions and to make such statements as they may desire.
During the company’s two most recent fiscal years ended June 1, 2019, and June 2, 2018, and the subsequent interim period through July 30,
2019, the effective date of E&Y’s dismissal (the “Relevant Period”), (i) there were no disagreements (as defined in Item 304(a)(1)(iv) of Regulation
S-K and the related instructions to Item 304 of Regulation S-K) between the company and E&Y on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedures that, if not resolved to the satisfaction of E&Y, would have caused
E&Y to make reference to the subject matter of the disagreement in its report, and (ii) there were no reportable events (as defined in Item 304(a)
(1)(v) of Regulation S-K).
During the Relevant Period, neither the company nor anyone acting on its behalf consulted KPMG regarding either (i) the application of accounting
principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the company’s financial
statements, and neither a written report nor oral advice was provided to the company that KPMG concluded was an important factor considered
by the company in reaching a decision as to any accounting, auditing, or financial reporting issue, or (ii) any matter that was either the subject
of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304 of Regulation S-K) or a reportable
event (as defined in Item 304(a)(1)(v) of Regulation S-K).
We are asking our shareholders to ratify the selection of KPMG as our independent registered public accounting firm. Although ratification is
not legally required, the Board is submitting the selection of KPMG to our shareholders for ratification as a matter of good corporate governance.
The affirmative vote of the holders of the majority of the shares represented in person or by proxy and entitled to vote on this item will be required
for approval. Abstentions and broker non-votes will not be treated as votes cast on this matter. Unless otherwise instructed by you, brokers,
banks, and other street-named holders will have the discretionary authority to vote your shares on this matter.
If our shareholders do not ratify the appointment, the appointment will be reconsidered by the Audit Committee and the Board. Even if the
selection is ratified, the Audit Committee, at its discretion, may select a different independent registered public accounting firm at any time during
the year if it determines that such a change would be in the best interest of our company and our shareholders.
The Board of Directors recommends a vote FOR this proposal to ratify the appointment of KPMG as our company’s independent
registered public accounting firm for Fiscal 2020.
Disclosure of Fees Paid to Independent Auditors
Aggregate fees billed to us for the fiscal years ended June 2, 2018 and June 1, 2019, by our independent registered public accounting firm,
Ernst & Young LLP were as follows:
Fiscal Year Ended
Audit Fees (1)
Audit Related Fees
Tax Fees (2)
Total
June 2, 2018 June 1, 2019
$ 2,153,500 $ 2,211,400
—
—
445,000
115,000
$ 2,598,500 $ 2,326,400
(1)
(2)
Includes fees billed for the audit of and accounting consultations related to our consolidated financial statements included in our Annual Report on Form 10-K, including the
associated audit of our internal controls, the review of our financial statements included in our quarterly reports on Form 10-Q, and services in connection with statutory and
regulatory filings.
Includes fees billed for tax compliance, tax advice, and tax planning.
Our Audit Committee has adopted a policy for pre-approving services performed by our independent registered accounting firm and other firms.
This policy requires the Committee's pre-approval of all services that may be provided by our independent registered public accounting firm and
certain audit services provided by other firms. The policy authorizes the committee to delegate to one or more of its members pre-approval
authority with respect to permitted services. All services provided by E&Y under the captions “Audit Fees,” “Audit Related Fees,” and “Tax Fees”
were approved by the Audit Committee under this policy.
16 2019 Proxy Statement
Report of the Audit Committee
The Audit Committee’s purpose is to oversee the accounting and financial reporting processes of the company, the audits of the company’s
financial statements and management’s assessment of the company’s internal controls, the qualifications of the public accounting firm engaged
as the company’s independent registered public accounting firm, and the performance of the company’s internal auditors and independent
registered public accounting firm. The Committee’s function is more fully described in its charter, which the Board has adopted and is available
on the company's web site at http://www.hermanmiller.com/content/dam/hermanmiller/documents/investors/audit_committee_charter.pdf. The
Committee reviews the charter on an annual basis. The Board annually reviews the NASDAQ listing standards definition of independence for
audit committee members and has determined that each member of the Committee meets that standard.
Management is responsible for the preparation, presentation, and integrity of the company’s financial statements, accounting and financial
reporting principles, internal controls, and procedures designed to ensure compliance with accounting standards, applicable laws, and
regulations. The company’s independent registered public accounting firm during fiscal 2019, Ernst & Young LLP, held responsibility for
performing an independent audit of the consolidated financial statements and expressing an opinion on the conformity of those financial
statements with U.S. generally accepted accounting principles. Ernst & Young LLP was also responsible for auditing and providing an opinion
on the effectiveness of the company’s internal control over financial reporting.
We have reviewed and discussed, with management and Ernst & Young LLP, the Company’s audited financial statements for the year ended
June 1, 2019, management’s assessment of the effectiveness of the company’s internal controls over financial reporting, and Ernst & Young
LLP’s evaluation of the company’s internal controls over financial reporting.
We have discussed with Ernst & Young LLP the results of the independent auditors’ examinations and the judgments of the independent
auditors concerning the quality, as well as the acceptability, of the company’s accounting principles and such other matters that we are required
to discuss with the independent auditors under applicable rules, regulations or generally accepted auditing standards, including the matters
required to be discussed by applicable rules of the Public Company Accounting Oversight Board ("PCAOB"). We have also received and
reviewed the written disclosures and the letter from Ernst & Young LLP per the applicable requirements of the PCAOB regarding Ernst and
Young LLP's communications with the Audit Committee around independence and we have discussed with Ernst & Young LLP their
independence including a consideration of the compatibility of non-audit services with their independence.
Based on the reviews and discussions referred to above, we recommended to the Board of Directors that the financial statements referred
to above be included in the company’s Form 10-K Report for the year ended June 1, 2019. We selected KPMG, LLP as the independent
auditor for fiscal year 2020. The Board is recommending that shareholders ratify that selection at the annual meeting.
Lisa A. Kro (Chair)
J. Barry Griswell
Michael C. Smith
Herman Miller, Inc., and Subsidiaries 17
Proposal #3 - Proposal to Approve, on an Advisory Basis, the Compensation Paid to the Company's Named Executive
Officers
Consistent with our Board's recommendation, as approved by our shareholders and as required pursuant to Section 14A of the Securities
Exchange Act, we allow our shareholders the opportunity to vote, on an advisory and annual basis, on the compensation of our named executive
officers ("Say on Pay"). Thus, you are asked to vote upon the following resolution at this year's annual meeting.
The Executive Compensation Committee ("Committee") has considered the results of the 2018 advisory vote on executive compensation in
which more than 96% of the votes cast were voted for the approval, on an advisory basis, of the compensation of our named executive officers
as described in the 2018 Proxy Statement. Consistent with those voting results, the Committee believes that the total compensation paid to the
Chief Executive Officer and the other named executive officers, as disclosed in the Compensation Discussion and Analysis, is fair and appropriate
and should be approved by our shareholders. The compensation of the named executive officers is designed to vary with the results of the
business and to reward consistent improvement in the results delivered to shareholders. In fiscal year 2020, changes in the base compensation
of each executive officer primarily reflect changes in the benchmarking data for the position. The change in the variable element of each
executive's compensation reflects our financial and related performance relative to performance criteria approved by the Committee and Board.
The Committee believes that the compensation to each named executive officer as disclosed in the Compensation Discussion and Analysis is
appropriate in the light of the Company's and the officer's performance during the fiscal year. In addition, each of the elements of compensation
at target has been benchmarked against comparable positions.
Shareholders are being asked to approve the following resolution at the Annual Meeting:
“RESOLVED, that the compensation paid to the company's named executive officers, as disclosed in the company's Proxy Statement for this
annual meeting pursuant to the rules of the SEC, including the Compensation Discussion and Analysis, the compensation tables and narrative
disclosure, is hereby APPROVED."
The Board of Directors recommends a vote FOR this proposal.
This vote is advisory and non-binding; however, the Board of Directors and Committee will review and consider the voting results in connection
with future deliberations concerning our executive compensation program.
Voting Securities and Principal Shareholders
On August 16, 2019, we had 59,054,301 shares of common stock issued and outstanding, par value $.20 per share. Shareholders are entitled
to one vote for each share of common stock registered in their names at the close of business on August 16, 2019, the record date for the Annual
Meeting fixed by our Board of Directors. Votes cast at the meeting and submitted by proxy will be tabulated by Broadridge Financial Solutions,
Inc. As of August 16, 2019, no person was known by management to be the beneficial owner of more than five percent of our common stock,
except as follows.
Amount and
Nature
of Beneficial
Ownership
Percent
of Class
6,868,890
11.63
5,623,073
9.52
This information is based solely upon information as of June 30, 2019, contained in filings with the SEC on August 13, 2019 by BlackRock, Inc., including notice that it has,
along with certain institutional investment managers for which it is the parent holding company, sole voting power as to 6,709,139 shares and sole dispositive power as to
6,868,890 shares.
This information is based solely upon information as of June 30, 2019, contained in a filing with the SEC on August 14, 2019 by The Vanguard Group Inc., including notice
that it has sole voting power as to 129,077 shares and sole dispositive power with respect to 5,492,746 shares, and shared voting power as to 8,106 shares and shared
dispositive power with respect to 130,597 shares.
(2)
Name and Address of Beneficial Owner
BlackRock, Inc.(1)
55 East 52nd Street
New York, NY 10055
The Vanguard Group, Inc.(2)
PO Box 2600
Valley Forge, PA 19482
(1)
18 2019 Proxy Statement
Director and Executive Officer Information
Security Ownership of Directors
The following table shows, as of August 16, 2019, the number of shares beneficially owned by each of the nominees and directors. Except as
described in the notes following the table, the following persons have sole voting and dispositive power as to all their respective shares.
Name
Mary Vermeer Andringa
David A. Brandon(2)
Douglas D. French(2)
J. Barry Griswell
John R. Hoke III
Lisa A. Kro
Heidi J. Manheimer
Andrea R. Owen
Michael C. Smith
Michael A. Volkema
Amount and Nature of
Beneficial Ownership
Percent of
Class(1)
39,281
16,809
11,848
21,366
30,924
21,608
16,217
see table below
3,279
75,000
0.07
0.03
0.02
0.04
0.05
0.04
0.03
0.01
0.13
(1) Percentages are calculated based upon shares outstanding plus shares that may be acquired under stock options exercisable within 60 days.
(2) Excludes 1,143 Shares held in Mr. Brandon's deferred compensation account and 3,842 shares held in Mr. French's deferred compensation account.
Security Ownership of Management
The following table shows, as of August 16, 2019, the number of shares beneficially owned by each of the Named Executive Officers (NEOs)
identified in the executive compensation tables of this Proxy Statement, and by all directors and executive officers as a group. Except as described
in the notes following the table, the following persons have sole voting and dispositive power as to all their respective shares.
Name
Andrea R. Owen
Brian C. Walker(3)
Jeffrey M. Stutz
Gregory J. Bylsma
Stephen C. Gane(4)
Jeremy J. Hocking
B. Ben Watson
All executive officers and directors as a group (23 persons)(5)
Amount and Nature of
Beneficial Ownership(1)
Percent of
Class(2)
25,816
—
82,164
38,263
18,300
19,644
65,410
534,816
0.04
—
0.14
0.06
0.03
0.03
0.11
0.91
(1) Includes the following number of shares with respect to which the NEOs have the right to acquire beneficial ownership under stock options exercisable within 60 days: 25,816
shares for Ms. Owen; 58,579 shares for Mr. Stutz; 6,032 shares for Mr. Bylsma; no shares for Mr. Gane; and 39,461 shares for Mr. Watson. Includes the following number of
deferred equity units; 9526 units for Mr. Gane and 3900 units for Mr. Stutz.
(2) Percentages are calculated based upon shares outstanding plus shares that may be acquired under stock options exercisable within 60 days.
(3) Mr. Walker served as our President and Chief Executive Officer until his retirement on August 21, 2018
(4) Mr. Gane's employment with the Company ended on May 31, 2019.
(5) Included in this number are 180,352 shares with respect to which executive officers and directors that have the right to acquire beneficial ownership under options
exercisable within 60 days. Includes the following number of deferred equity units 14,611.
Herman Miller, Inc., and Subsidiaries 19
Letter from the Executive Compensation Committee Chair
Dear Fellow Herman Miller Shareholder,
Fiscal 2019 reflected a year of positive financial performance driven by significant sales growth and impressive operating margin expansion,
despite greater than expected pressure from commodity input costs and tariffs during the year. Looking ahead, Andi Owen and her leadership
team developed a set of compelling strategic priorities to guide the organization forward that were shaped by industry trends and leverage core
Herman Miller capabilities to create shareholder value.
We are proud of the successes we achieved financially and operationally during the year as detailed in the "Financial Highlights from Fiscal
2019" section of this proxy statement. Our executive compensation programs continue to exhibit strong alignment with financial performance:
•
•
Executive annual incentive awards were paid at 77.61% of target, which reflected adjusted EBITDA performance (as described in the
"Reconciliation of Non-GAAP Measures" on pg. 48) of $290.8 million versus a target of $300.9 million. These results reflected the pressures
from higher than expected commodity and tariff-related costs during fiscal 2019.
On a three-year basis, however, HMVA performance did not meet the threshold performance level and HMVA units granted for the
2017-2019 performance period did not result in an incentive payout.
We continue to evaluate our executive compensation programs to most effectively align long-term incentive compensation with long-term
shareholder value. As a result, we have made the following plan design changes effective for fiscal 2020:
•
•
•
Replace Adjusted EBITDA with Adjusted Operating Income as the primary financial metric in the annual incentive program. This change
better aligns our performance targets with a sharp focus on capital allocation and operating margin expansion.
Establish incentive payout targets for the leadership team based on consolidated corporate performance to better align them with our One
Herman Miller strategic priority.
Revise the mix of long-term incentive awards, as described in more detail later in this report, to weight performance results more fully
towards our strategic focus on operating income and revenue growth, with actual payout modified based on our relative total shareholder
return.
These changes complement the existing strong governance and best practices already underlying our executive compensation programs to
balance the inherent need to attract, retain, and incentivize world class talent while aligning our entire organization directly with long-term
shareholder interests.
Our Say on Pay Proposal is found on page 18 of this proxy statement, and the Board recommends that you vote ‘FOR’ this proposal. We also
invite you to consider additional information on our compensation philosophy and decisions in the Compensation Discussion and Analysis. I am
confident that our executive compensation programs will drive the behaviors and results the Board expects and those that are in the best long-
term interest of our shareholders.
Sincerely,
David A. Brandon
Chair, Board Executive Compensation Committee
20 2019 Proxy Statement
Compensation Discussion and Analysis
Executive Summary
Executive Officers Covered by this Compensation Discussion and Analysis
We are required to provide information regarding our compensation policies and decisions related to our President and Chief Executive Officer
(including any individual who served as our Chief Executive Officer during the past fiscal year), our Chief Financial Officer, and the three other
most highly compensated executive officers serving as executive officers at the end of the fiscal year (including up to two additional offices who
would qualify as a named executive officer but for the fact that he or she was not serving as such as of 2019 fiscal year-end). We refer to the
foregoing individuals for whom disclosure is required as our Named Executive Officers ("NEOs"). We intend this Compensation Discussion and
Analysis to provide information regarding, among other things, the overall objectives of our compensation program and each element of
compensation provided to the NEOs.
The NEOs for fiscal year 2019 and their titles are listed in the following table:
Name
Andrea R. Owen
Brian C. Walker (1)
Jeffrey M. Stutz
Gregory J. Bylsma
Stephen C. Gane (2)
Jeremy J. Hocking
B. Ben Watson
Title
President and Chief Executive Officer (CEO)
Former President and Chief Executive Officer
Chief Financial Officer (CFO)
President, North America Contract
Former President, Herman Miller Specialty Brands
President, Herman Miller International
Chief Creative Officer
(1)
(2)
Mr. Walker was not eligible to participate in the fiscal 2019 annual incentive or long-term incentive programs due to his retirement. Mr. Walker retired effective August 21,
2018, from all positions with the company including as a member of our Board of Directors. Mr. Walker is listed as a NEO in accordance with the SEC's disclosure requirements.
Mr. Gane's role as President of Herman Miller Specialty Brands ended on May 31, 2019, the day before the last day of fiscal 2019 year end. Mr. Gane is listed as a NEO
in accordance with the SEC's disclosure requirements.
Fiscal 2019 Company Performance
We continued to make significant progress in fiscal 2019 on our long-term vision for creating shareholder value. In addition to meaningful progress
on our key strategic priorities, we achieved increased sales and orders for the ninth consecutive year and delivered consolidated revenue of
$2,567.2 million in fiscal 2019. Revenue growth, strong expense management, and a lower tax rate helped offset commodity costs and tariff
headwinds to deliver adjusted EPS 29%(1) over the prior year, which is discussed elsewhere in this Proxy Statement. We also continued to
maintain a strong balance sheet and cash flow profile. As a result of this financial performance, we recently announced a 6% increase to our
quarterly dividend rate beginning in October 2019.
Overview of Compensation Philosophy and How We Set Pay
Overview of Compensation Program
We have designed our compensation program to provide executive officers performing their duties at a proficient level with target compensation
levels that reflect the market median compensation for their position based upon data that our independent compensation consultant provides
(as we describe in the section on "Benchmarking of Compensation"). The compensation program requires that a majority of the executive officer’s
compensation be determined based upon the company’s performance. The Committee believes that the compensation program, through the
use of base salary, annual incentive and long-term incentive awards (referred to collectively as "total annual compensation") operates in a
manner consistent with these objectives. The Committee also believes that the compensation program rewards performance that generates
both consistent and long-term enhancement of shareholder value.
(1) Non-GAAP measurements; see accompanying reconciliations and explanations on pg. 48.
Herman Miller, Inc., and Subsidiaries 21
Compensation Discussion and Analysis (continued)
Compensation Philosophy
The Company's compensation philosophy, as approved by the committee, is to provide compensation levels that are commensurate with
individual and company-wide performance by rewarding appropriate levels of risk-taking in consideration of creating shareholder value. We
establish market-competitive target compensation levels but provide the opportunity to earn above or below-target levels based on this
performance. Consistent with this philosophy, the key objectives of our executive officer compensation program are to:
•
•
•
•
Link a material portion of executive officers' total annual compensation directly to the company's performance.
Reinforce our commitment to our people, planet, and communities.
Align the interests of executive officers with the long-term interests of shareholders.
Attract, motivate, and retain executive officers of outstanding ability.
Compensation Policies and Practices That Reflect Our Compensation Philosophy
What We Do
Pay for Performance
Balance Long-Term and Short-Term Incentives
Benchmark Compensation Against an Appropriate Peer Group
Maintain Clawback Policy
Conduct an Annual Risk Assessment
Maintain Stock Ownership Requirements
Prohibit Hedging and Pledging
Limit Perquisites
Engage an Independent Compensation Consultant
Hold Executive Officer Sessions at Each Committee Meeting
What We Do Not Do
x
x
x
x
x
No Gross-Ups for Excise Taxes
No "Single Trigger" Severance
No Repricing of Options
No Guaranteed Compensation
No Dividends on Unvested Equity
22 2019 Proxy Statement
Compensation Discussion and Analysis (continued)
Elements of the Compensation Program
The following table provides an executive summary of our fiscal 2019 compensation program for our executive officers:
Compensation Element
General Description
Objective of Compensation Element
Base Salary
Base salaries reflect market rates for comparative
level of
positions, each NEO's historical
proficiency and performance, as well as their roles
and duties.
The base salary of NEOs typically varies around the
individual’s experience,
median depending on an
performance and internal equity considerations. The
Committee or the Board in each circumstance uses its
judgment and experience in setting the specific level of
base salary relative to the general market median data.
Annual Incentive
to
incentive pursuant
We provide executive officers the opportunity to
earn an
the Annual
Executive Incentive Cash Bonus Plan. The plan
provides for the annual payment of a cash bonus
(incentive) to selected executive officers based
upon the performance of the company (and in
some cases, various business units and/or
functional goals) during the fiscal year. The
primary measure of financial performance for the
fiscal 2019 incentive was measured by adjusted
EBITDA, which
the company's
represents
earnings before interest, taxes, depreciation and
amortization
non-controlling
(excluding
ownership interests).
Long-Term
Equity Incentives
An executive officer's total cash compensation is
comprised of both base salary and annual
incentive.
The Committee and Board have historically
granted various types of long-term incentive
awards
including: Restricted Stock Awards,
Restricted Stock Units, Performance Share Units,
Relative TSR Performance Share Units, and
Stock Options with a three year vesting period.
Retirement and
Health Benefits
Other Executive
Compensation Plans
We maintain retirement plans along with a broad
base of health insurance plans available to full-
time and most part-time employees.
We provide limited additional compensation
programs to our executive officers including a
compensation protection program in the form of
long-term disability; a retirement
executive
equalization program in the form of a non-qualified
retirement match program with an optional
deferred compensation element.
The purpose of the Annual Executive Incentive Cash
Bonus Plan is to closely link incentive cash compensation
to the creation of shareholder value. We intend for the plan
to foster a culture of performance, promote employee
accountability, and establish a framework of manageable
risks imposed by variable pay. We also intend the plan to
reward long-term, continued improvements in shareholder
value with a share of the wealth created.
The Committee believes that, to support the Company's
strategy around operating as a single business unit as well
as supporting functional business units, it is important to
tie a significant portion of the executive officers' annual
incentive to the overall company performance (as well as
functional business units supported by executive officers
as applicable).
The key objectives of granting long-term equity incentive
awards are:
- to provide an appropriate level of equity reward to
executive officers that ties a meaningful part of their
compensation to the long-term returns generated for
shareholders.
- to provide an appropriate equity award to the next level
of executive officers where market data would support their
inclusion in an annual equity award plan.
- to assist the achievement of our share ownership
requirements.
- to attract, retain and reward key employees. We believe
a significant portion of executive officer pay should be
aligned with long-term shareholder returns and that
encouraging long-term strategic thinking and decision-
making requires that executive officers have a significant
stake in the long-term success of Herman Miller.
The NEOs participate in such retirement plans and health
insurance plans on the same terms as all other employees
within their respective geographic region or business unit.
It is our goal to provide market competitive benefits which
allow us to attract and retain critical executive talent.
Herman Miller, Inc., and Subsidiaries 23
Compensation Discussion and Analysis (continued)
The following charts illustrate the key elements of our compensation for our NEOs:
Elements of Total Annual Compensation for fiscal 2019
Base Salary Fiscal 2019
The Committee and the Board granted merit increases for fiscal 2019 to our employees, including the NEOs. The base salaries of each of our
NEOs was within the range established based on market data for their position. Salary changes went into effect on or after July 16, 2018, and
are detailed as follows:
Name
Andrea R. Owen (1)
Brian C. Walker (2)
Jeffrey M. Stutz
Gregory J. Bylsma
Stephen C. Gane
Jeremy J. Hocking (3)
B. Ben Watson
(1) Ms. Owen became President and CEO of the Company as of August 22, 2018.
(2) Mr. Walker retired effective August 21, 2018 and did not receive a salary increase for fiscal 2019.
(3) Measured in pounds sterling at an exchange rate of 1.2994 would yield £268,000.
Salary for Fiscal
2019
1,000,000
975,000
480,000
480,000
350,000
348,234
445,000
$
$
$
$
$
$
$
Percent Increase
from Prior Year
N/A
—%
6.7%
3.2%
2.9%
28.8%
3.5%
Ms. Owen’s salary was established in connection with her commencement as the company’s President and CEO. Mr. Stutz’s increase is the
result of his proficient performance in his role as CFO, particularly in light of the complexities in the global financial environment. Mr. Bylsma’s
increase reflects his continued improvement of the company’s operations capabilities as well as his new responsibility for the overall North
America Contract business which includes North America Work, Government, Healthcare and Education businesses. Mr. Gane's increase was
in recognition of his leadership of the Specialty Business. Mr. Hocking increase was in recognition of his new leadership role as President of
24 2019 Proxy Statement
Compensation Discussion and Analysis (continued)
Herman Miller International. Mr. Watson’s increase is in recognition of the improvement in the company’s brand strategy and messaging, his
new responsibility for R&D and our global portfolio of new products.
Due to a reorganization of the leadership team In February 2019, Messrs. Stutz, Bylsma, and Watson received a base salary increase due to
increased responsibilities. Their salaries for fiscal 2019 after the reorganization are as follows:
Name
Jeffrey M. Stutz
Gregory J. Bylsma
B. Ben Watson
Annual Executive Incentive Cash Bonus Plan
Setting Incentive Targets
Salary for
Fiscal 2019
510,000
$
550,000
$
480,000
$
Percent
Increase
6.3%
14.6%
7.3%
Each year, the Committee establishes a target incentive for each participant, expressed as a percentage of base salary, which is the incentive
amount the NEO would receive if all performance goals were achieved at target. The NEOs each have the opportunity to earn up to a maximum
of 200% of target and may earn zero percent of target if our goals are not achieved. The annual cash incentive opportunity levels for each of
our NEOs for 2019, as a percentage of base salary, were as follows:
Name
Andrea R. Owen
Brian C. Walker
Jeffrey M. Stutz
Gregory J. Bylsma
Stephen C. Gane
Jeremy J. Hocking
B. Ben Watson
Threshold Incentive
as % of Base Salary
0%
N/A
0%
0%
0%
0%
0%
Target Incentive as %
of Base Salary
100%
N/A
65%
65%
65%
65%
65%
Maximum Incentive as
% of Base Salary
200%
N/A
130%
130%
130%
130%
130%
We set the target incentive percentage for the NEOs so that the incentive at target performance will generally equal 100% of the market median
incentive amount for comparable positions as shown in the market data and yield a median target total compensation opportunity, although we
may adjust base pay and incentive to maintain total compensation in an amount that is consistent with our compensation philosophy. The
Committee believes that this use of incentive is consistent with the objective of making compensation for executive officers more variable with
the company’s performance.
The Committee, at the beginning of each fiscal year, establishes threshold, target, and maximum performance goals under our Annual Executive
Cash Incentive Bonus Plan. The Committee determines these performance goals after review and discussion with management of the company’s
annual financial plan as approved by the Committee and the Board. For fiscal 2019, each NEO’s annual incentive was tied to our 2019 consolidated
adjusted EBITDA results. Messrs. Bylsma, Gane, and Hocking also had a portion of their incentive based on the adjusted EBITDA results for
the business units they lead.
2019 Performance Results and Incentive Payouts
For fiscal 2019, the Committee established consolidated adjusted EBITDA performance goals based on its review of the Board-approved financial
plan and discussions with management. The target was set above fiscal 2018 target and actual adjusted EBITDA performance reflecting our
growth imperative and our expectations of continued growth in specified markets.
Performance Measure
Consolidated adjusted EBITDA
Threshold
$255.8M
Performance Goals
Target
$300.9M
Maximum
$346.0M
Actual Performance
$290.8M
Herman Miller, Inc., and Subsidiaries 25
Compensation Discussion and Analysis (continued)
Based on the performance results for fiscal 2019, the incentive amounts the Company paid to the NEOs were as follows:
Target
incentive
Percent Tied
to adjusted
EBITDA
Company
Performance
Factor
Incentive
Earned
For Company
Performance
Target
Incentive
Percent tied
to Business
Unit
Business
Unit
Performance
Factor
Incentive
Earned
For Function/
Bus Unit
Performance
100.00%
N/A
65.00%
32.50%
32.50%
32.50%
65.00%
0.7761 $
0.7761 $
0.7761 $
0.7761 $
0.7761 $
0.7761 $
0.7761 $
776,100
—
243,324
124,548
87,882
87,825
227,413
32.50%
32.50%
32.50%
0.7943 $
1.6407 $
2.0000 $
Total Incentive
Amount
Paid
$
$
$
127,462 $
185,800 $
226,352 $
$
776,100 $
— $
243,324 $
252,010 $
273,682 $
314,181 $
227,413 $
Incentive
Amount
Deferred (1)
38,805
—
26,766
25,201
54,736
—
22,741
Name
Andrea R. Owen
Brian C. Walker
Jeffrey M. Stutz
Gregory J. Bylsma
Stephen C. Gane
Jeremy J. Hocking
B. Ben Watson
(1)
This amount represents the portion of the bonus that the NEO elected to defer under the Herman Miller, Inc. Executive Equalization Retirement Plan described later in this
Compensation Discussion and Analysis.
Prior to incentive payout, the Audit Committee approves the calculation of financial results for the year and the resulting company performance
factor. The Committee also certifies the company performance factor and the function/business unit performance factors for use in the incentive
calculation. The Committee did not elect to exercise any discretion in its determination of incentive payouts for the NEOs.
Long-Term Equity Incentives
Setting Target LTI Values
For each Executive Officer, the Committee calculates a target value of LTI grants for the current fiscal year that is expressed as a percentage
of base salary and determines the percent of the target LTI value that should be allocated to each award type. The Committee sets the total
target value of the LTI grants for each NEO at a level intended to ensure that the NEO’s total direct compensation would correspond with the
market median of the market data for a comparable NEO’s individual position. Following the end of the fiscal year, the Committee determines
the total value of LTI grants for each NEO based on each NEO’s target value and the company’s financial performance for that year relative to
target. We convert that value for each NEO into grants of restricted stock units and performance share units based on the closing price of our
stock on the date of grant and grants of stock options using a Black-Scholes valuation on the date of grant, using the share price on the date
of grant as the exercise price.
Grants Awarded in Fiscal 2019
The table below illustrates the target value of the LTI grants, expressed as a percentage of the NEO's base salary, that the Committee and
Board established and granted in July 2018, and in the case of Ms. Owen, were granted on August 22, 2018, the date of her commencement
of employment and in accordance with her employment agreement with the Company. The target values associated with these grants were
allocated approximately equally among the following four award types: RSUs, Herman Miller Value Added Performance Share Units, Relative
Total Shareholder Return Performance Share Units, and stock options. Each of these awards, as described in more detail below, directly ties
management’s compensation opportunity to the creation of shareholder value.
The following table discloses the awards granted in fiscal 2019:
Name
Andrea R. Owen
Brian C. Walker
Jeffrey M. Stutz
Gregory J. Bylsma
Stephen C. Gane
Jeremy J. Hocking
B. Ben Watson
26 2019 Proxy Statement
Target of
LTI as a %
of Salary
250%
N/A
125%
125%
90%
80%
90%
Restricted
Stock
Units
16,383
—
3,672
3,794
1,997
1,459
2,526
Herman Miller Value
Added Performance
Share Units at
Target
Relative Total
Shareholder Return
Performance Share
Units at Target
16,383
—
3,672
3,794
1,997
1,459
2,526
12,164
—
2,647
2,735
1,440
1,052
1,821
Number
of Stock
Options
77,447
—
17,512
18,096
9,527
6,958
12,049
Option
Exercise
Price
38.15
N/A
38.30
38.30
38.30
38.30
38.30
Compensation Discussion and Analysis (continued)
Key Features of Each Award
Restricted Stock Units: The restricted stock units (RSUs) represent the right to receive shares of Herman Miller, Inc. common stock. Each unit
represents the equivalent of one share of the common stock as of the date of grant and cliff vests after three years. RSUs convert into shares
upon vesting. Dividends are not paid over the vesting period but accrue on the RSUs and are added to the total value of the units at the time
of vesting. Upon vesting, three years after grant, the actual value an executive officer may realize is directly related to the value created over
the vesting period.
Herman Miller Value Added Performance Share Units: The Herman Miller Value Added (HMVA) performance share units are units representing
the right to receive company shares of at the end of the specified performance period. The Committee establishes the Herman Miller Value
Added goals at the start of each three-year performance period. These units cliff vest after three years if certain Herman Miller Value Added
goals are met. The awards provide that the total number of shares that vest may vary between 0% and a maximum of 200% of the number of
units awarded depending upon performance relative to the established Herman Miller Value Added goal. HMVA performance share units convert
into company stock upon vesting. Dividends do not accrue on the awards. The awards also provide the Committee the ability to extend the
performance period to a total of five years; however, if the extension is granted, then no more than 34% of the target grant may vest.
Herman Miller Value Added is defined as the Company’s annual earnings before interest, taxes, depreciation and amortization, adjusted for
non-recurring and special charges as outlined below (EBITDA), less a capital charge. The capital charge for each cycle is determined by
multiplying the company’s capital by its cost of capital. The Committee approves the determination of the cost of capital and EBITDA for purposes
of the Herman Miller Value Added Performance Share Units. HMVA PSUs are not earned if the Company has not been able to generate returns
above our cost of capital - and the value of any units that are earned is directly related to the value shareholders have realized over the
performance and vesting period.
Relative Total Shareholder Return ("TSR") Performance Share Units: Relative TSR Performance Share Unit Awards are units representing the
right to receive company shares at the end of the specified performance period. These units cliff vest after three years if we meet certain TSR
objectives. The awards provide that the total number of shares that finally vest may vary between 0% and a maximum of 200% of the number
of units awarded depending upon performance relative to established total shareholder return goals, with the award amount vesting if performance
is at the target level. Any value ultimately realized by the executive officers is directly related to both Herman Miller’s relative TSR as well as
the absolute performance of our share price.
TSR is the total shareholder return to Herman Miller shareholders including reinvested dividends and share price changes that occur during a
fiscal year. We determine TSR performance by comparing the company’s TSR to a peer group of companies. The peer group of companies for
fiscal year 2019 is the same as the peer group that we use for purposes of benchmarking NEO compensation, and those companies are described
below in the section entitled "Benchmarking of Compensation".
For Relative TSR Performance Share Units granted in fiscal year 2019, the Committee established the following vesting goals:
Payout % of Target
200% of Target PSUs
100% of Target PSUs
No PSUs Earned
3-year Average Relative TSR
80th percentile or greater
50th percentile
Below 30th percentile
Stock Options: The options vest ratably over three years and have a ten-year life, and the exercise price of each option equals the fair market
value of our stock on the date of grant.
Program Design Changes for Fiscal 2020
The following chart illustrates design changes made to both the Annual Incentive and Long-Term Incentive Programs that simplify the programs
and ensure alignment and motivation of executive officers towards achieving key strategic priorities while delivering strong financial performance
and creating shareholder value.
Herman Miller, Inc., and Subsidiaries 27
Compensation Discussion and Analysis (continued)
Design Change
Replaced Adjusted EBITDA with Adjusted Operating
income as the primary financial metric.
Incentive will be based solely on consolidated
corporate performance for all participants.
Annual
Incentive
Program
Long-Term
Incentive
Program
Change in the mix of LTI awards from: 25% HMVA
PSUs, 25% rTSR PSUs, 25% stock options, and 25%
time-based RSUs to 45% Operating Income Growth
PSUs, 30% Revenue Growth PSUs, and 25% time-
based RSUs; with the PSUs having a rTSR modifier
of +/-25%.
Reason for Change
- Operating income is more closely monitored by investors.
- Operating income better recognizes our goals related to capital allocation
and margin expansion.
- Coming together as a family of complementary brands under
One Herman Miller requires the entire leadership team to be aligned
around the same corporate performance goals.
- Reduce dilution while creating greater focus on absolute long-term
financial performance. 75% of executive officers’ long-term incentive
award opportunity is subject to achievement of multi-year financial goals.
- Operating Income and Revenue Growth provide clear line of sight for
our employees and our shareholders on the alignment of our financial
performance with share price. The growth orientation of these new
measures is clearly linked to our strategy.
- The payout opportunity for all PSUS (75% of the target award opportunity)
is subject to modification based on our TSR performance relative to the
peer group.
- The relative TSR modifier provides for a 25% increase to the PSU vesting
if our relative TSR performance is at or above the 75th percentile of the
peer group or a 25% decrease to the PSU vesting if our relative TSR
performance is below the 25th percentile of the peer group.
- The relative TSR modifier cannot increase the PSU payout above 200%
of target.
-Create a more direct linkage between critical financial goals and
leadership team earning opportunity.
-Our performance against our three-year growth goals will have a
significant impact on our ability to create future shareholder value.
Base Salary for Fiscal 2020
The Committee and Board of Directors approved the following changes in the base salaries of the continuing NEOs for fiscal 2020 as we discuss
below:
Name
Andrea R. Owen
Jeffrey M. Stutz
Gregory J. Bylsma
Jeremy J. Hocking (1)
B. Ben Watson
Salary for
Fiscal 2020
Percent
Increase
1,000,000
516,000
556,000
400,000
486,000
—%
1%
1%
15%
1%
(1)
Measured in pounds sterling at an exchange rate of 1.2994 would yield £307,834.
Mr. Hocking’s increase was in recognition of continued expanding of responsibilities in new role and the International business unit’s performance.
Messrs. Stutz, Bylsma, and Watson received mid-year increases in fiscal 2019 as mentioned in the Base Salary Fiscal 2019 section. The 1%
increase is due to adjustments made to their compensation packages as part of the elimination of the bundled benefits program. Ms. Owen’s
base salary was not adjusted for fiscal 2020.
LTI Grants Awarded in Fiscal 2020
The target value of the LTI grants that the Committee and Board established for our NEOs that occurred in July 2019 (fiscal 2020) as a percent
of base salary was 275% for Andrea Owen and 125% for Jeffrey Stutz, Gregory Bylsma, Jeremy Hocking and Ben Watson. The total target
value was allocated 45% Adjusted Operating Income PSUs, 30% Revenue Growth PSUs, and 25% RSUs with the PSUs having a rTSR modifier
of +/-25%.
28 2019 Proxy Statement
Compensation Discussion and Analysis (continued)
The following table discloses the types of awards granted in July 2019 (fiscal 2020):
Name
Andrea R. Owen
Jeffrey M. Stutz
Gregory J. Bylsma
Jeremy J. Hocking
B. Ben Watson
Restricted Stock Units
Adjusted Operating
Income Performance
Share Units at Target
Revenue Growth
Performance Share Units
at Target
15,319
3,593
3,871
2,787
3,384
25,976
6,093
6,565
4,725
5,738
17,317
4,062
4,377
3,150
3,826
Details of our Executive Compensation Program
Role of the Committee
The Committee consists of three directors, each qualifying as independent under NASDAQ’s listing requirements. The Board has determined
that each member of the Committee also meets the definition of independence under our corporate governance guidelines and qualifies as a
non-employee director for purposes of Rule 16b-3 under the Securities Exchange Act of 1934.
The Committee’s primary functions are to oversee the compensation philosophy and strategy, to determine or recommend the compensation
of company executive officers, including the NEOs, and to act as the administrative committee for our executive compensation and broad-based
equity and benefit plans.
The Committee is also responsible for providing recommendations to the full Board with respect to all aspects of the annual compensation of
our President and CEO. In addition, the Committee, based upon recommendations from our CEO, approves the annual compensation for all
other officers covered by Section 16 of the Securities Exchange Act of 1934 including the NEOs and other executive officers. Our President and
CEO establishes the base salary of all other executive officers.
Among other responsibilities, the Committee establishes the performance objectives for the Annual Executive Incentive Cash Bonus Plan and
our equity-based compensation plans, which cover the President and CEO, NEOs, other executive officers and other executive employees.
The Committee is also tasked to review and approve compensation and benefit plans as required by the Committee Charter and review the
annual compensation plans’ risk assessment. The Committee annually reviews tally sheets for each NEO that reflect the total direct compensation
provided to the NEOs and information relating to all other elements of compensation including payments under severance or change in control
obligations. The Committee uses this information to help it determine that our compensation program is consistent with market norms and with
our compensation philosophy and the objectives referenced above.
Role of the External Compensation Consultants
The Committee has the authority and sole discretion to select independent compensation consultants, legal consultants and other advisors to
provide it independent advice. The Committee retained Pay Governance LLC as its independent compensation consultants with respect to the
compensation matters regarding our executive officers for fiscal 2019. The independent services that Pay Governance provided to the Committee
included reviewing the elements of compensation of the President and CEO as well as the other executive officers and comparing those elements
to our compensation philosophy and objectives and to market practices. We do not permit Pay Governance to provide other consulting services
to the company.
Pay Governance concluded that our compensation program established for those officers is consistent with our compensation philosophy and
objectives as well as with market practices. With the approval of the Committee, management retained Meridian Compensation Partners LLC
in fiscal 2019 to provide compensation consulting services to management for employees other than the executive officers.
Benchmarking of Compensation
To ensure that executive officer compensation is competitive, the Committee uses marketplace compensation data to compare our compensation
program to market pay practices. The Committee, in determining fiscal 2019 compensation, also used a specific peer group for benchmarking
compensation. A listing of the peer group members is provided below. This peer group included both direct competitors as well as comparable
companies in other industries to reflect the competitive market for talent in which we compete.
Herman Miller, Inc., and Subsidiaries 29
Compensation Discussion and Analysis (continued)
Pay Governance used the peer group information along with the following survey sources when analyzing the fiscal 2019 market competitiveness
of pay levels of executive officers: Willis Towers Watson Executive Compensation Database, Aon Hewitt Executive Total Compensation
Measurement Database and Mercer Executive Database (we refer to the peer group information and these survey sources collectively as “market
data”). The market data is used to determine competitiveness of base pay, annual incentive and long-term incentive awards. Pay Governance
uses a regression analysis and aging to make allowances for time differences in the data and to align the data so that it is representative of
companies having revenues equivalent to the operations that our individual executive officers manage. Pay Governance compared the base
salary, target total cash and target total direct compensation of each executive officer to the 25th, 50th (market median) and 75th percentile of
the Market Data for a comparable benchmark position.
Pay Governance provided the Committee with benchmarking data, market practices and trends, peer group selection and pay for performance
evaluation information to provide appropriate context for the Committee’s deliberations. Our former CEO made recommendations to the
Committee regarding the compensation package for each of the executive officers (other than himself). The former CEO based his
recommendations with respect to executive officers on the Pay Governance information, his evaluation of the individual’s performance, the
company’s performance and other factors. The Committee based its approval of the former CEO’s recommendations for the compensation of
executive officers (other than the CEO) on the Committee’s review of the information from Pay Governance relative to market pay, advice from
Pay Governance and the Committee members’ own judgment, including their judgment on the relative performance of both the company and
its executive officers. Ms. Owen’s compensation was established in connection with the commencement of her employment with the Company.
The Committee reviews and approves the peer group that we use in benchmarking compensation on an annual basis. The peers that we used
for fiscal 2019 are set forth below:
American Woodmark Corporation
Armstrong World Industries, Inc.
Ethan Allen Interiors, Inc.
Hill-Rom Holdings, Inc.
HNI Corporation
Interface, Inc.
JELD-WEN Holdings, Inc.
Kimball International, Inc.
Knoll, Inc.
La-Z-Boy, Inc.
Leggett & Platt, Inc.
Masonite International Corporation
RH aka Restoration Hardware Holdings, Inc.
Sleep Number Corporation
Steelcase, Inc.
Tempur Sealy International, Inc.
Universal Forest Products, Inc.
Williams-Sonoma, Inc.
Our peer group is intended to represent companies against which we may compete for talent, with an emphasis on a number of criteria. For
fiscal 2019, we made a number of changes to the 2018 peer group in light of these criteria: We removed Aaron’s, Acuity Brands, Belden,
Brunswick, Lennox International and Polaris because of differences in industry and customer focus. We replaced these six companies with
American Woodmark, Armstrong World Industries, JELD-WEN, Masonite, Universal Forest Products and Williams Sonoma which better meet
our selection criteria and enable us to maintain a peer group of robust size.
EBITDA Adjustments
The Committee has adopted guidelines for determining when adjustments to the company’s EBITDA are appropriate in calculating incentive
plan performance. Under these guidelines, the Committee will consider whether adjustments are appropriate to best reflect the operating results
of our business and appropriately incent management in a manner that is in the best interest of shareholders. Some common examples of
potential adjustments under the guidelines include restructuring related charges, transaction costs, effects of purchase accounting, and income
associated with acquisitions. We may exclude these items only in limited circumstances or only for certain periods or specified awards. The
guidelines also include a framework for evaluating potential EBITDA adjustments that considers as to a potential item of adjustment:
Its impact on near-term cash flows;
• Whether it is material to the result of the business;
•
• Whether it is an accounting adjustment that does not reflect the ongoing operations of the business;
• Whether it aligns the company’s performance outlook with long-term shareholder interests;
• Whether the adjustment unfairly impacts one business unit;
Whether the company has made similar adjustments in recent reporting periods; and
• Whether the related income or expense was offset in a prior reporting period (and, if so, if it was excluded from EBITDA).
30 2019 Proxy Statement
Compensation Discussion and Analysis (continued)
For fiscal 2019, company EBITDA performance was adjusted for incentive plan purposes to reflect the following items (refer to the section
“Reconciliation of Non-GAAP Measures” for further information):
Description
Restructuring Charges, net of amortization
Adjustment
to EBITDA
($ millions)
$8.9
Third Party Consulting Expense, net of amortization
$(4.8)
CEO Transition Plan Expenses
Investment Gain
$4.5
$(2.1)
Rationale for the Adjustment
Ensure management’s near-term compensation goals are not in
conflict with the long-term strategic objectives of the business.
Instead, these costs will be amortized over a 5-year period and such
amortization will be included in the annual incentive bonus
calculation.
Ensure the company's profit optimization plans for the Retail and
North America Contract business segments are not in conflict with
management’s near-term compensation goals. Instead, related
costs are amortized against EBITDA as the savings from the
initiatives are realized on a dollar-for-dollar basis. Third party
consulting expense was fully amortized as of 2019 fiscal year-end
CEO transition plan costs are not reflective of the ongoing operation
of the business.
The Committee determined it is appropriate to exclude a one-time,
non-cash investment gain.
Long-Term Equity Incentives
Our 2011 Long-Term Incentive Plan (which we refer to as the LTI Plan) authorizes us to grant various forms of equity-based compensation
(which we refer to as Long-Term Incentive Grants or LTI grants or awards). The Committee is responsible for administering all elements of the
LTI Plan and for making all Long-Term Incentive Grants, with the exception of the CEO whose grants the Board approves.
The Committee establishes targets relating to Long-Term Incentive awards at the beginning of each fiscal year for grants made in July for that
fiscal year. Typically, the Committee and the Board at their June and July meetings take four actions in connection with our LTI Plan: (a) set the
target value for the LTI awards for the current fiscal year, (b) determine the types of awards to be used for the current fiscal year, (c) establish
the performance criteria, if any, for certain awards for the current fiscal year; and (d) grant the long-term incentive awards for the current fiscal
year.
Grants under the LTI Plan are typically made in connection with the Board of Directors meeting in July of each year following the public release
of our fiscal year-end financial results. We do not attempt to influence the amount of executive officer compensation by timing equity grants in
connection with the disclosure of material information to the public. The backdating of equity award dates is specifically prohibited under policies
adopted by the Board of Directors.
Retirement and Health Benefits
Health Plans
We maintain a broad-base of health insurance plans available to all full-time and qualified part-time employees. The NEOs participate in such
health insurance plans on the same terms as all other employees within their respective geographic region or business unit.
Retirement Plans
We maintain broad-based retirement plans available for employees in the United States and the United Kingdom (UK). Our retirement plans
are designed to provide an appropriate level of replacement income upon retirement. The benefits available to NEOs are the same as those
available to other non-executive employees in their respective geographic region subject to limitations provided by law or regulation. The
retirement plans include:
•
•
The Herman Miller, Inc. Profit Sharing and 401(k) Plan
The Herman Miller Limited Retirement Benefits Plan (UK)
Herman Miller, Inc., and Subsidiaries 31
Compensation Discussion and Analysis (continued)
Profit Sharing Plan and 401(k) Plan: The Herman Miller, Inc. Profit Sharing and 401(k) Plan consists of two parts. First, we make a core contribution
to an employee’s 401(k) account equal to 4% of base salary on a quarterly basis. The amount of salary included in the calculation is limited to
the maximum salary level permitted by the IRS. Second, the 401(k) portion of the plan permits employees to make salary deferrals into the
plan up to the maximum amount permitted by law. We also make a matching contribution to fully match employee contributions up to 4% of the
employee’s compensation contribution.
Herman Miller Limited Retirement Plan: Herman Miller Limited, our wholly owned UK subsidiary, provides a defined contribution retirement plan
which provides for a non-discretionary fixed company contribution and a company matching contribution. The fixed company contribution for
employees varies between 2.4% and 6.4% of the employee’s eligible compensation depending upon age and date of hire. In addition, the
company will match an employee’s contributions up to an additional 2.8% of eligible compensation. Jeremy Hocking is the only NEO who
participates in this defined contribution retirement plan. He is also a participant in the frozen defined benefit plan sponsored by Herman Miller
Limited for employees hired prior to March 1, 2012.
Other Executive Compensation Plans
Deferred Compensation Plan
The Herman Miller, Inc. Executive Equalization Retirement Plan was approved by the Committee and the Board in 2007. The plan is a supplemental
deferred compensation plan and became available for salary deferrals beginning in January 2008. The plan is available to highly compensated
United States employees who are selected for participation by the Committee. All NEOs are currently able to participate, except Jeremy Hocking
due to his employment outside the United States. The plan allows participants to defer up to 50% of their base salary and 100% of their incentive.
Company contributions to the plan “mirror” the amounts we would have contributed to the Herman Miller Profit Sharing and 401(k) Plan had the
employee’s compensation not been above the statutory ceiling (currently $280,000). Investment options under this plan are the same as those
available under the 401(k) Plan. Company contributions in fiscal 2019 appear in the 2019 Summary Compensation Table under All Other
Compensation.
Executive Long-Term Disability Plan
The plan covers 60% of the rolling two-year average of compensation. executive officers are eligible to participate when they have earned over
$6,000 in annual executive incentive compensation. This benefit continues as long as the executive officer remains disabled until age 65. The
monthly benefit is capped at $10,000.
Perquisites
We eliminated the program previously provided to executive officers, effective May 31, 2019. The Committee has adopted a policy that specifically
restricts the use of corporate aircraft for non-business purposes.
Mr. Hocking has a Spouse Travel Reimbursement benefit in the amount of £20,000. He must pay the expense as incurred from his personal
funds and submit the proper form for reimbursement. This reimbursement benefit does not have a carry forward option to the next plan year.
In fiscal 2019, we provided the NEOs and all other executive officers with the opportunity to obtain comprehensive physicals at our cost.
Retirement, Retention, and Change in Control Agreements
Mr. Brian C. Walker’s Retirement
As previously disclosed, Mr. Walker retired from his position with the company as of August 21, 2018. In connection with his retirement, Mr.
Walker agreed to extend his post-employment non-compete and non-solicitation covenants from 12 to 18 months and to an unlimited confidential
information and non-disparagement covenant. He also agreed to be available on a consultative basis for 18-months after his retirement to help
with the transition of the new CEO and specifically to provide the new CEO with guidance and back ground on our unique “contract” furniture
business. In exchange for agreeing to extend his post-employment non-compete and non-solicitation covenants and to provide consulting
services for up to 18 months, we agreed to pay Mr. Walker his base salary for an additional six months. Because Mr. Walker was already entitled
to 12 months of base salary in exchange for his original 12 months of non-compete and non-solicitation covenants, he received base salary
continuation for a total of 18 months following his retirement. We also agreed to provide Mr. Walker with a lump sum payment equal to 18
months of the employer portion of the premiums for his health and dental benefits. Mr. Walker was not eligible for any equity compensation
grants for fiscal 2019 or for a 2019 annual incentive opportunity.
32 2019 Proxy Statement
Compensation Discussion and Analysis (continued)
Change in Control Agreements
Each NEO is party to a change in control agreement with us. The Committee believes the use of change in control agreements is appropriate
as they help ensure a continuity of management during a possible take-over and help ensure that management remains focused on completing
a transaction that is likely to maximize shareholder value. Potential payments under the change in control agreements are included in the tally
sheets that the Committee reviews annually.
The narrative and footnotes to the tables entitled Potential Payments upon Termination, Death, Disability, Retirement or Change in Control
describe the change in control payments in greater detail.
Hedging and Pledging Policy
The Committee and the Board of Directors have adopted a policy prohibiting the Board of Directors and executive officers from hedging the
economic risk of their ownership of our stock, including options or other derivatives related to the stock, and are prohibited from pledging Herman
Miller stock.
Stock Ownership Guidelines
The Committee believes that significant stock ownership by top management is of critical importance to our ongoing success, as it helps link
the interests of senior management and our shareholders. As such, we have established stock ownership guidelines, which apply to the members
of the Leadership Team and, beginning January 1, 2018, certain other executive officers who work alongside the Leadership Team to ensure
global strategic alignment across business units and functions. The stock ownership guidelines require these individuals to own shares of our
common stock equal to a specified multiple of their annual base salary. The applicable levels are as follows:
•
•
•
•
President and Chief Executive Officer
Executive officers with LTIP target equal to or greater than 100% of salary
Certain other direct reports to the CEO
Other executive officers
6 times base salary
4 times base salary
3 times base salary
1 times base salary
Stock Retention Requirements
Until the ownership guidelines are met, the executive officer must retain 40% of the pretax spread value of vested restricted stock, performance
shares, restricted stock units, deferred stock, and 40% of the pretax spread value of exercised stock options must be retained in company stock.
Compliance with the requirements is determined at each time an executive officer disposes of company stock.
Incentive Clawback
The Herman Miller Compensation Recovery Policy provides for the recoupment of certain compensation from Executive Officers in the event
of a restatement and/or improper conduct. The Board may, in its sole discretion, after evaluating the associated costs and benefit, and any other
factors it deems relevant, seek to recover all or any portion of the recoverable incentive paid to any such Executive Officer during the applicable
period.
Deductibility of Compensation
Section 162(m) of the Internal Revenue Code generally disallows a tax deduction to public corporations for compensation in excess of $1 million
paid for any fiscal year to individuals who are covered executives. For compensation paid for fiscal 2019, as a result of changes made to the
applicability of Section 162(m) of the Code pursuant to the Tax Cuts and Jobs Act, our number of covered executives expanded to include our
covered executives for 2019 plus any executive who, serves as our CEO or CFO, or who is among the three most highly compensated executive
officers, for any fiscal year. In addition, only qualifying performance-based compensation that is paid pursuant to a binding contract in effect on
November 2, 2017 will be exempt from the deduction limit. Accordingly, any compensation that we pay in the future pursuant to new compensation
arrangements entered into after November 2, 2017, even if performance-based, will count towards the $1 million fiscal year deduction limit if
paid to a covered executive. Because of these changes to Code Section 162(m) by the Tax Cuts and Jobs Act, some of the compensation that
we provide to our named executive officers in 2019 and future years may not be deductible under Section 162(m).
Herman Miller, Inc., and Subsidiaries 33
Compensation Discussion and Analysis (continued)
Post-Employment Compensation
The NEOs are generally “at will” employees. This means that they can be discharged at any time and for no reason. We have agreed to pay
executive officers' severance if they are terminated for reasons other than malfeasance or voluntary separation. For each NEO, severance
would be equal to 18 months of base salary subject to the employee not competing with us during that period. The Committee’s determination
as to the amount of severance payments for these NEOs is the result of benchmarking our practices to the market data. In addition, we maintain
the health insurance on such employee during the salary continuation period. In exchange for such payments the employee provides the company
with a mutual release of all claims and agrees not to work for a competitor or solicit our employees during the salary continuation period.
Executive Compensation Committee Report
The Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with
Management and, based on such review and discussions, the Committee recommended to the Board that the Compensation Discussion and
Analysis be included in the Proxy Statement.
David A. Brandon (chair)
Douglas D. French
Heidi J. Manheimer
34 2019 Proxy Statement
Summary Compensation Table
The summary compensation table below shows the compensation for the NEOs for the fiscal years ended June 1, 2019 (2019), June 2, 2018
(2018) and June 3, 2017 (2017). The details of the company's executive officer compensation program are found in the Compensation Discussion
and Analysis (CD&A) above.
Name and Principal Position
Year
Salary
($)
Stock
Awards
($)(1)
Option
Awards
($)(1)
Non-Equity
Incentive Plan
Compensation
($)(2)
All Other
Compensation ($)(3)
Total ($)
Andrea R. Owen (4)
President and Chief Executive Officer
Brian C. Walker (5)
Former President and Chief
Executive Officer
Jeffrey M. Stutz
Executive Vice President and Chief
Financial Officer
Gregory J. Bylsma
President, North America Contract
Stephen C. Gane (6)
Former President, Herman Miller
Specialty
Jeremy J. Hocking (7)
President, Herman Miller
International
B. Ben Watson
Chief Creative Officer
2019
742,308
1,837,820
624,997
776,100
226,895
4,208,120
2019
2018
2017
2019
2018
2017
2019
2018
2017
2019
2018
2017
2019
2018
2017
2019
2018
2017
281,250
966,327
916,846
482,308
442,116
392,115
493,846
461,058
438,423
348,462
337,635
323,423
348,234
279,344
267,495
450,769
426,058
403,108
—
—
—
827,908
1,109,158
1,782,466
920,000
1,626,984
1,240,002
413,575
734,197
225,982
427,319
820,191
347,057
224,944
507,927
162,729
164,340
330,618
31,510
284,507
639,249
190,314
140,621
146,670
316,667
145,311
183,335
379,166
76,502
86,668
208,996
55,873
64,481
31,522
96,753
107,997
223,246
894,142
684,059
243,324
265,888
190,176
252,010
269,903
214,257
273,682
229,423
117,629
314,177
189,563
103,627
227,413
261,429
227,474
165,106
4,728,041
233,597
4,701,488
321,011
1,600,839
40,183
57,383
1,629,054
1,182,323
322,357
1,640,843
49,080
83,616
1,783,567
1,462,519
378,896
1,302,486
21,238
60,475
1,182,891
873,252
337,756
1,220,380
110,225
126,253
974,231
560,407
407,293
1,466,735
126,104
1,560,837
148,624
1,192,766
(1)
(2)
For all NEOs, amounts represent the aggregate grant date fair value of stock awards and option awards computed in accordance with FASB ASC Topic 718. The assumptions
used in calculating these amounts are set forth in Note 9 of the company's consolidated financial statements for the fiscal year ended June 1, 2019 included in our Annual
Report on Form 10-K.
Includes the amounts earned in fiscal 2019 and paid in fiscal 2020 under the Executive Incentive Cash Bonus Plan as described in the Compensation Discussion and Analysis
for the NEOs. Certain executives have elected to defer a part of the incentive under the Key Executive Deferred Compensation Plan. The amount of the deferrals and the
corresponding company contributions will be shown in next year's Nonqualified Deferred Compensation Table.
The amounts for fiscal 2019 for all other compensation are described in the table below.
(3)
(4) Ms. Owen's employment with the Company commenced on August 22, 2018.
(5) Mr. Walker retired as President and Chief Executive Officer as of August 21, 2018.
(6) Mr. Gane's employment ended on May 31, 2019.
(7) Amounts paid to Mr. Hocking in GBP during fiscal 2019 are converted to USD using the average annual conversion rate for fiscal 2019 of 1.2994.
Herman Miller, Inc., and Subsidiaries 35
Bundled
Benefits(1)
Car Allowance
(UK Only)
Long-term
Disability
Insurance
Relocation
Expenses
Personal Use
of Company
Property
Retention and
Severance(2)
Total Other
Compensation
Nonqualified
Deferred
Compensation
Contribution(3)
Payment in
Lieu of
Pension
Contribution
(UK Only)
—
—
—
—
—
—
—
—
—
—
11,617
126,532
—
—
Andrea R. Owen
Brian C. Walker
Jeffrey M. Stutz
Gregory J. Bylsma
Stephen C. Gane
Jeremy J. Hocking (4)
B. Ben Watson
—
—
16,176
11,719
21,865
7,865
22,073
—
226,895
—
—
—
—
8,336
1,296
2,661
3,435
3,716
—
3,543
—
—
—
—
—
—
—
826,612
265,888
269,903
329,423
183,406
261,429
—
—
36,286
37,300
23,892
—
33,822
226,895
827,908
321,011
322,357
378,896
337,756
407,293
—
86,426
(1) Bundled Benefits are provided on a calendar year basis and include accounting fees, cell phone fees, club dues, family travel, education and training, home office expenses,
vehicle expenses, and life insurance. Benefits for Messrs. Bylsma, Hocking, Stutz, and Watson include the approved amount for calendar 2019 plus carryover for calendar
year 2018. Benefits for Mr. Gane include the approved amount for calendar 2019 plus carryover for calendar year 2018 and 2017. The bundled benefits program was
discontinued as of 2019 fiscal year-end and all allowable calendar year expenses were incurred during fiscal 2019.
(2) As part of the CEO transition, the Board initiated retention agreements with executive leaders that included a cash bonus payment matching to actual bonus percentage
achieved for FY18, subject to a maximum payout amount of 250% (inclusive of the matching payment) of their annual target bonus, which 50% was paid on the date FY18
annual bonuses were paid (July 12, 2018) and 50% on the last pay period in December 2018 (December 27, 2018).
(3) Amounts represent the company's contribution to the Herman Miller, Inc. Executive Equalization Retirement Plan.
(4) Mr. Hocking serves the company through its United Kingdom subsidiary. As such, his benefits are paid according to the benefits paid in the United Kingdom, which are different
from the benefits in the United States. His benefits include car allowance, spouse travel, and contributions to a pension plan. All amounts paid to Mr. Hocking in GBP are
converted to USD using the average annual conversion rate for fiscal 2019 of 1.2994.
36 2019 Proxy Statement
Grants of Plan-Based Awards
The Grants of Plan-Based Awards table below sets forth information on equity awards granted by the company to the NEOs during fiscal 2019
under the Long-Term Incentive Plan (LTI Plan) and the possible payouts to the NEOs under the Annual Executive Incentive Cash Bonus Plan
(Annual Cash Bonus Plan) for fiscal 2019. The Compensation Discussion and Analysis provides further details of grants under the LTI Plan, as
well as the performance criteria under the Annual Cash Bonus Plan. (The LTI grants are discussed in the CD&A under the heading Long-Term
Equity Incentives Grants Awarded in Fiscal 2019).
Name
Grant
Date
Estimated Possible Payouts Under
Non-Equity Incentive Plan Awards(1)
Estimated Future Payouts
Under Equity Incentive Plan
Awards (2)
Threshold
($)
Target
($)
Maximum
($)
Threshold
(#)
Target
(#)
Maximum
(#)
Andrea R. Owen
08/22/18
0
28,547
57,094
Jeffrey M. Stutz
08/22/18
08/22/18
07/16/18
07/16/18
07/16/18
0 1,000,000
2,000,000
0
6,319
12,638
Gregory J. Bylsma
07/16/18
0
6,529
13,058
0
313,500
627,000
07/16/18
07/16/18
Stephen C. Gane
07/16/18
0
3,437
6,874
0
321,000
642,000
07/16/18
07/16/18
Jeremy J. Hocking
07/16/18
0
2,511
5,022
0
226,500
453,000
B. Ben Watson
07/16/18
07/16/18
07/16/18
07/16/18
07/16/18
0
226,352
452,704
0
4,347
8,694
All Other
Stock
Awards:
Number
of Shares of
Stock or
Units (#)(3)
All Other
Option
Awards:
Number of
Securities
Underlying
Options (#)(4)
Exercise
or
Base Price
of Option
Awards
($/Sh)(5)
Grant Date
Fair Value
of Stock
and Option
Awards ($)(6)
16,383
77,447
38.15
1,212,808
625,012
624,997
3,672
3,794
1,997
1,459
2,526
272,937
140,638
140,621
282,088
145,310
145,311
148,459
76,458
76,502
108,461
55,880
55,873
187,762
96,746
96,753
17,512
38.30
18,096
38.30
9,527
38.30
6,958
38.30
12,049
38.30
0
293,000
586,000
(1) Under the Annual Cash Bonus Plan, executives can earn incentive compensation based on the achievement of certain company performance goals. The actual Cash Bonus
amount paid with respect to any year may range from 0 to 2 times of the target based upon the relative achievement of our adjusted EBITDA targets as set forth in the Summary
Compensation Table above.
(2) The performance share units represent the right to receive shares of the company's common stock, and such shares are to be issued to participants at the end of a measurement
period beginning in the year that performance shares are granted. The units reflect the number of shares of common stock that may be issued if certain adjusted EBITDA
(earnings before interest, taxes, depreciation and amortization) and TSR return goals are met. The PSUs provide that the total number of shares which finally vest may vary
between 0 and 200% of the target amount depending upon performance relative to the established adjusted EBITDA and TSR goals, respectively, and cliff vest after three years.
(3) The restricted stock units represent the right to receive shares of the company's common stock. These units reflect fair market value of the common stock as of the date of grant
and cliff vest after three years.
(4) Each option has a term of ten years and vests pro rata over three years.
(5) Stock options are awarded at an option price not less than the market value of the company's common stock at the grant date in accordance with the LTI Plan.
(6) Aggregate grant date values are computed in accordance with FASB ASC Topic 718. For performance share units, the grant date fair value was determined based upon the
vesting at 100% of the target units awarded.
Herman Miller, Inc., and Subsidiaries 37
Outstanding Equity Awards at Fiscal Year-End
The Outstanding Equity Awards at Fiscal Year-End table below shows the option awards and stock awards that were outstanding as of June 1,
2019. The table shows both exercisable and unexercisable options. The table also shows share units and equity plan awards that have not
vested.
Name
Grant Date
Number of
Securities
Underlying
Unexercised
Options (#)(1)
Exercisable
Option Awards
Number of
Securities
Underlying
Unexercised
Options (#)(1)
Unexercisable
Option
Exercise
Price
($)
Stock Awards
Option
Expiration
Date
Number of
Shares or
Units of
Stock That
Have Not
Vested (#)(2)
Market
Value of
Shares or
Units of
Stock That Have
Not Vested ($)(3)
Equity Incentive
Plan Awards:
Number
of Unearned
Shares, Units or
Other Rights That
Have Not Vested
(#)(4)
Equity Incentive
Plan Awards: Market
or Payout Value
of Unearned Shares,
Units or Other
Rights That Have
Not Vested ($)(3)
Andrea R. Owen
08/22/18
Brian C. Walker
07/19/16
07/18/17
—
—
—
77,447
38.15 08/22/28
16,663
591,370
75,110
31.86 07/19/26
95,988
33.75 07/18/27
Jeffrey M. Stutz
07/19/16
38,353
19,180
31.86 07/19/26
07/18/17
02/09/18
07/16/18
7,651
15,302
33.75 07/18/27
—
17,512
38.30 07/16/28
Gregory J. Bylsma
07/19/16
21,699
22,966
31.86 07/19/26
07/18/17
02/09/18
07/16/18
9,563
19,128
33.75 07/18/27
—
18,096
38.30 07/16/28
Stephen C. Gane
07/19/16
12,655
07/18/17
07/16/18
Jeremy J. Hocking
07/19/16
07/18/17
02/09/18
07/16/18
07/18/11
07/17/12
B. Ben Watson
4,521
3,818
3,364
—
7,388
9,363
—
—
31.86 07/19/26
33.75 07/18/27
1,909
6,727
31.86 07/19/26
33.75 07/18/27
6,958
38.30 07/16/28
—
—
25.75 07/18/21
18.17 07/17/22
07/19/16
27,038
13,522
31.86 07/19/26
07/18/17
02/09/18
07/16/18
5,634
11,267
33.75 07/18/27
—
12,049
38.30 07/16/28
3,883
4,508
12,686
3,735
5,964
5,634
13,108
3,859
1,053
1,991
7,535
1,491
3,270
3,319
12,122
2,569
137,811
159,989
450,214
132,549
211,662
199,951
465,203
136,956
37,383
70,660
267,414
52,898
116,060
117,801
430,194
91,182
28,547
26,365
27,259
3,662
4,346
6,319
5,624
5,432
6,529
2,564
1,641
1,050
989
1,911
1,013,133
935,694
967,422
129,964
154,240
224,261
199,596
192,782
231,714
90,996
58,239
37,265
35,100
67,821
2,511
89,115
3,084
3,200
109,451
113,568
4,347
154,275
(1) Options vest in three equal annual installments beginning on the first anniversary of the grant date.
(2)
The 02/09/18 awards issued reflect credited dividends through the end of fiscal 2019 and cliff vest after two years. The remaining awards reflect credited dividends through
the end of fiscal 2019 and cliff vest after three years.
(3) Assumes a stock price of $35.49 per share, which was the closing price of a share of common stock on the last trading day of fiscal 2019.
(4)
The Performance Share Unit awards cliff vest after three years, depending upon the achievement of certain adjusted EBITDA and TSR return goals. For the July 2016
equity award, the actual three-year average HMVA performance was $181 million, which is below the $191 million threshold, resulting in a 0% payout.
38 2019 Proxy Statement
Option Exercises and Stock Vested
This table provides information on the number and value of options exercised in fiscal 2019 and the vesting of restricted stock (on an aggregate
basis).
Name
Option Awards
Stock Awards
Andrea R. Owen
Brian C. Walker
Jeffrey M. Stutz
Gregory J. Bylsma
Stephen C. Gane
Jeremy J. Hocking
B. Ben Watson
Number of
Shares
Acquired on
Exercise (#)
—
153,437
2,419
28,533
—
—
—
Value
Realized
on Exercise
($)(1)
—
980,484
31,288
208,660
—
—
—
Value Realized
on Vesting ($)(2)
Number of
Shares
Acquired on
Vesting (#)
—
—
142,214
5,395,022
5,868
22,932
25,884
6,818
13,560
227,399
888,619
955,964
253,857
525,456
(1) Represents the difference between the exercise price and the fair market value of our common stock on the date of exercise.
(2) Value based on the closing market price of the company's common stock on the vesting date.
HMVA PSUs Vesting in 2019
HMVA PSUs granted in fiscal 2016 were eligible to vest in fiscal 2019. The threshold performance level of $191 million was not achieved. The
Committee chose not to utilize their discretion to extend the performance period and, therefore, no awards vested.
Pension Benefits
The Pension Benefits table below provides certain information regarding the retirement benefits available under the only retirement plan of the
company that is not a defined contribution plan to the only NEO that participates in the plan at the end of fiscal 2019.
The retirement plan is described in the Compensation Discussion and Analysis.
Name
Plan Name
Number of Years
Credited Service (#)
Present Value of
Accumulated Benefit ($)
Payments During Last
Fiscal Year ($)
Jeremy J. Hocking (1)
Herman Miller Limited Retirement Plan
14
6,474,575
—
(1) Mr. Hocking was covered from 1990-2002 and beginning again during fiscal 2011 under the UK Pension Plan which is now frozen.
Herman Miller, Inc., and Subsidiaries 39
Nonqualified Deferred Compensation
The Nonqualified Deferred Compensation table below provides certain information relating to our two compensation plans that provide for the
deferral of compensation on a basis that is not tax-qualified.
Name
Andrea R. Owen
Brian C. Walker
Jeffrey M. Stutz
Gregory J. Bylsma
Stephen C. Gane
Jeremy J. Hocking (4)
B. Ben Watson
Executive Officer
Contributions in Last
Fiscal Year ($)(1)
Registrant
Contributions in Last
Fiscal Year ($)(2)
Aggregate Earnings in
Last Fiscal Year ($)(3)
21,154
94,031
59,727
65,390
80,731
—
71,220
—
—
36,286
37,300
23,892
—
33,822
41
1,092
1,252
2,436
11,332
—
3,743
Aggregate
Withdrawals/
Distributions ($)
—
3,390,570
—
92,975
45,483
—
—
Aggregate Balance at
Fiscal Year End ($)
21,195
—
334,963
486,292
659,045
—
597,295
(1) Amounts in this column represent the deferrals of base salary earned in fiscal 2019 which are included in Summary Compensation Table under Salary, plus deferral of amounts
earned in fiscal 2018 and paid in fiscal 2019 under the Annual Executive Incentive Cash Bonus Plan which was included in the fiscal 2018 Summary Compensation Table under
Non-Equity Incentive Plan Compensation.
(2) Amounts in this column represent the company's contribution and are included in the "All Other Compensation" column of the Summary Compensation Table.
(3) Amounts reflect increases (decreases) in value of the employee's account during the year, based upon deemed investment of deferred amounts.
(4) Mr. Hocking is not eligible to participate in the Nonqualified Deferred Compensation plan.
The Committee approved The Herman Miller, Inc. Executive Equalization Retirement Plan for salary and incentive compensation deferrals that
began in January 2008. The Plan allows all United States employees who have compensation above the statutory ceiling to defer income in
the same proportion as if the statutory ceiling did not exist. The company makes contributions to the plan such that the amounts in the plan
“mirror” the amounts the company would have contributed to the company’s tax-qualified 401(k) plan had the employee's compensation not
been above the statutory ceiling. Distributions from the plan are paid out in cash based on the deferral election specified by the participant. We
do not guarantee a rate of return under the Plan. Instead, participants make investment elections for their deferrals and company contributions.
Investment options are the same as those available under our 401(k) plan.
40 2019 Proxy Statement
Potential Payments upon Termination, Death, Disability, Retirement or Change in Control
The following table quantifies the estimated payments that would be made to each NEO in the event of his termination by the company without
cause, in the event of his termination under circumstances that would trigger payments under change in control agreements, and upon a change
in control without a termination of employment, in each case assuming that the change in control and/or termination occurred May 31, 2019.
Name
Benefit
Death
Disability
Retirement Without Cause Change in Control
Andrea R. Owen
Cash Severance(1)
$1,500,000
$6,000,000
Prorated Annual Incentive
Equity
Restricted Stock Units(2)
Performance Shares(3) (4)
Unexercisable Options
Total
Retirement Benefits
Other Benefits
Health and Welfare(5)
Outplacement
Total
Total
Jeffrey M. Stutz
Cash Severance(1)
Prorated Annual Incentive
Equity
Restricted Stock Units(2)
Performance Shares(3) (4)
Unexercisable Options
Total
Retirement Benefits
Other Benefits
Health and Welfare(5)
Outplacement
Total
Total
591,381
337,711
591,381
—
929,092
591,381
—
—
—
—
—
—
$929,092
$591,381
—
—
—
—
—
—
$0
147,845
591,381
—
1,583,230
—
147,845
2,174,611
14,569
25,000
39,569
29,139
25,000
54,139
$1,687,414
$8,228,750
$765,000
$1,683,000
880,564
74,754
—
880,564
858,472
714,960
—
—
—
—
—
—
880,564
434,252
96,249
955,318
880,564
858,472
714,960
1,411,065
—
—
—
—
—
—
—
—
—
5,143
25,000
30,143
6,858
25,000
31,858
955,318
880,564
858,472
1,510,103
3,125,923
Gregory J. Bylsma
Cash Severance(1)
$825,000
$1,815,000
Prorated Annual Incentive
Equity
Restricted Stock Units(2)
1,013,770
1,013,770
990,944
825,336
1,013,770
Performance Shares(3) (4)
Unexercisable Options
Total
Retirement Benefits
Other Benefits
Health and Welfare(5)
Outplacement
Total
Total
77,238
—
—
—
—
—
—
—
467,063
116,649
1,091,008
1,013,770
990,944
825,336
1,597,482
—
—
—
—
—
—
—
—
—
23,982
25,000
48,982
31,976
25,000
56,976
$1,091,008
$1,013,770
$990,944
$1,699,318
$3,469,458
Herman Miller, Inc., and Subsidiaries 41
Potential Payments upon Termination, Death, Disability, Retirement or Change in Control (continued)
Name
Benefit
Death
Disability
Retirement Without Cause Change in Control
Jeremy J. Hocking(6)
Cash Severance(1)
$522,351
$1,253,642
Prorated Annual Incentive
Equity
Restricted Stock Units(2)
Performance Shares(3) (4)
Unexercisable Options
Total
Retirement Benefits
Other Benefits
Health and Welfare(5)
Outplacement
Total
Total
B. Ben Watson
Cash Severance(1)
Prorated Annual Incentive
Equity
Restricted Stock Units(2)
Performance Shares(3) (4)
Unexercisable Options
Total
Retirement Benefits
Other Benefits
Health and Welfare(5)
Outplacement
Total
Total
426,475
29,705
—
426,475
417,698
359,013
—
—
—
—
—
—
456,180
426,475
417,698
359,013
—
—
—
—
—
—
—
—
—
9,679
25,000
34,679
426,475
176,155
18,635
621,265
12,906
25,000
37,906
$456,180
$426,475
$417,698
$916,043
$720,000
$1,912,813
$1,584,000
755,237
51,425
—
755,237
740,040
637,124
—
—
—
—
—
—
755,237
302,839
68,689
806,662
755,237
740,040
637,124
1,126,765
—
—
—
—
—
—
—
—
—
13,238
25,000
38,238
17,651
25,000
42,651
806,662
755,237
740,040
1,395,362
2,753,416
(1)
"Without Cause" amount equals 18 months of base salary and "CIC" amount equals 3x (CEO) or 2x (Other NEOs) base salary + greater of prior year actual bonus or current
year target bonus.
(2) Awards are not pro-rated for "Death", "Disability" and "CIC". Awards are pro-rated for "Retirement" (if granted within the past 12 months) and "Without Cause" (excluding
(3)
(4)
2018 retention awards).
For "Death" (July 2018 grants), awards are pro-rated for the number of months between start of performance period and termination date. For "Disability" and "Without Cause"
and "Death" (July 2016 and July 2017 grants), awards are eligible for continued vesting (i.e., no accelerated vesting) after pro-ration. For "CIC", actual shares earned are
equal to target shares adjusted for actual performance. The following actual performance estimates were used: Herman Miller Value Added PSUs granted in 2016 = 0% of
target, Herman Miller Value Added PSUs granted in 2017 = 55% of target, Herman Miller Value Added PSUs granted in 2018 = 129% of target, Relative TSR PSUs granted
in 2018 = 193% of target.
There is no accelerated vesting of performance share units or stock options under a "Retirement" scenario (awards either continue to vest or are pro-rated for time employed
since grant).
"Without Cause" amount equals 18 months of benefits continuation and "CIC" amount equals 36 months (CEO) or 24 months (Other NEOs) benefits continuation.
(5)
(6) Amounts provided in GBP have been converted to USD using an exchange rate of 1 GBP = 1.29938 USD.
Potential Payments upon Termination without Change in Control
The company under its salary continuation plan has agreed to pay executive officers and other executives severance if they are terminated for
reasons other than cause. The payments are equal to 18 months' base salary continuation for the NEOs. In addition, the company maintains
the health insurance on such employee during the salary continuation period. In exchange for such payments, the employee provides the
company with a mutual release of all claims and agrees not to work for a competitor during the salary continuation period. In the event of a
termination covered by the change in control agreements described below, the payments under those agreements are reduced by any amounts
received under the salary continuation plan.
42 2019 Proxy Statement
Potential Payments upon Termination, Death, Disability, Retirement or Change in Control (continued)
The Executive Long-Term Disability Plan covers 60% of the rolling two-year average of compensation executive officers are eligible to participate
when they have earned over $6,000 in annual executive incentive compensation. This benefit continues as long as the executive officer remains
disabled until age 65. The monthly benefit is capped at $10,000.
Potential Payments upon Termination in Connection with Change in Control
In fiscal 2019, each NEO was party to a change in control agreement with the company. The change in control agreements are all “double
trigger” agreements. This means that both these must be a change in control and the employee must incur an actual or constructive termination
of employment by us to be entitled to a payment.
The agreements define change in control as having occurred (1) when a third party becomes the owner of 35 percent or more of the company's
stock, (2) when a majority of the Board of Directors is composed of persons who are not recommended by the existing Board, or (3) under
certain transactions involving a merger or reorganization, sale of all or substantially all of the company's assets or a liquidation in which the
company does not maintain certain control thresholds.
An employee is entitled to a payment under the change in control agreement if within 2 years after a change in control he or she (1) has his or
her employment with the company terminated by the company for reasons other than cause or (2) voluntarily terminates his or her employment
if (a) the responsibilities of his or her job are significantly reduced, (b) the base salary or incentive he or she receives is reduced, (c) the benefits
he or she receives are reduced by more than 5 percent, (d) the location of his or her job is relocated more than 50 miles from its current location,
or (e) the obligations of the change in control agreements are not assumed by any successor company.
If both triggering events occur, then the NEO is entitled to a change in control payment. The change in control payment consists of three elements
(1) amounts owed for current year base salary, on-target incentive prorated to the date of termination and all amounts of deferred income, (2)
medical and other insurance benefits, and (3) a separation payment. In addition, all existing unvested options and other equity units become
immediately vested and exercisable. The separation payment in the case of the CEO is to be equal to three times the amount described below
and in the case of all other NEOs the payment is equal to two times the amount described below. The separation payment is a lump sum equal
to either two or three times the sum of (a) the executive officer's base salary plus (b) the greater of the executive officer's actual incentive for
the preceding year or his or her on-target incentive for the current year. This amount is reduced by any severance payment that executive officer
receives under the severance benefit described above.
The company has no obligation to make a “gross up” payment to the executive officer if the amount of the payments under the change in control
agreements is subject to an excise tax under Section 4999 of the Internal Revenue Code of 1986.
To receive the payments, the NEO is obligated to comply with the non-competition covenant of the agreement, committing him or her to refrain
from competing with the company for a period equal to the number of years of compensation received by the NEO under the agreement.
Accelerated Vesting upon Death, Disability, Retirement or Change in Control
Various compensation plans contain provisions that permit accelerated vesting upon death, disability or change in control. In the event of a
change in control, the Key Executive Deferred Compensation Plan and the Executive Incentive Cash Bonus Plan provide for the acceleration
of payment even if the NEO has not been terminated. In addition, the vesting of each restricted stock unit and performance share unit will
accelerate upon a change in control under the terms of the award agreements. These are so-called single trigger payment provisions. These
so-called single trigger payments will no longer exist starting with grants in July 2018. The Long-Term Incentive Plan, Executive Incentive Cash
Bonus Plan and Key Executive Deferred Compensation Plan each has provisions dealing with vesting upon death, disability or retirement. The
definition of change in control for these plans is the definition contained in Treasury Regulations for Section 409A of the Internal Revenue Code.
Long-Term Incentive Plan
Change in Control
Under our 2011 Long-Term Incentive Plan, except as otherwise provided in an award agreement, awards that are outstanding at the time of a
change in control transaction, will accelerate and immediately vest if (1) awards are not assumed or continued by the surviving corporation or
(2) if the participant’s employment is terminated without cause or by the participant with good reason within a one-year period following the
change in control. However, all our award agreements for currently outstanding awards provide that the awards will vest immediately upon a
change in control. Going forward starting in July 2018, all awards are double-trigger awards. Specifically, with respect to performance-based
awards, if less than half the performance period has lapsed, those awards will be converted into shares or similar securities assuming target
performance has been achieved. If at least half of the performance period has lapsed, those performance-based awards will be converted into
shares or similar securities based upon actual performance-to-date. We quantify the benefits that each named executive officer would receive
Herman Miller, Inc., and Subsidiaries 43
Potential Payments upon Termination, Death, Disability, Retirement or Change in Control (continued)
upon a change in control in the table under the heading "Potential Payments upon Termination, Death, Disability, Retirement or Change in
Control."
Death, Disability and Retirement
Options granted under the LTI Plan to the extent vested at the date of death or disability remain exercisable for the balance of their original term
but not more than 60 months following the date of termination of employment. If an employee retires, the options granted prior to fiscal 2013 to
the extent vested remain exercisable for the balance of their original term but not more than 60 months following the date of termination of
employment. For options granted beginning in fiscal 2013, the grant will be prorated over 12 months if retiring within one year of the grant; after
the initial 12 months, they will vest in full. They remain exercisable for the balance of their original term but not more than 60 months following
the date of termination of employment. In all other cases, the vested options terminate three months after the termination of employment.
In the case of restricted stock units, if an employee dies or becomes disabled, units vest immediately. All vest ratably if the employee is terminated
for reasons other than cause. Vesting is determined by comparing the number of months the employee has been with the company between
the date of grant and the date of termination to the original vesting period. If an employee retires, units will be prorated over 12 months if retiring
within one year of the grant; after the initial 12 months, they will vest in full.
Performance shares, as explained earlier, are granted at a target value and the actual number of units converted into shares is determined at
the end of a 3-year measurement period. The percentage of the performance share target grant that is eligible to vest if an employee dies,
becomes disabled, or is terminated for reasons other than cause is determined by comparing the number of months between the date of grant
and the date of termination to the original vesting period. If an employee retires in the first year, the target performance share grant subject to
vesting will be prorated over 12 months. If the employee retires after the first year, 100 percent of the target performance share grant is subject
to vesting.
The Annual Executive Incentive Cash Bonus Plan
The Annual Executive Incentive Cash Bonus Plan requires that an employee be employed by the company on the last day of a fiscal year to
be eligible to receive the incentive, with certain exceptions noted below. The plan provides that in the events of death, disability or retirement
an employee does not need to be employed on the last day of the fiscal year to receive an incentive payout. The employee's incentive will be
reduced to reflect the portion of the year that he or she was employed by the company. In the event of a change in control, the incentive is
immediately vested (based upon actual results achieved through the date of the change in control) and payable and is not reduced by virtue of
the fact that it is calculated upon a partial year. The same provisions governing payment in the event of death, disability, retirement or change
in control are also found in the incentive plan applicable to all other employees.
44 2019 Proxy Statement
Pay Ratio
Pursuant to the SEC’s guidance under Item 402(u) of Regulation S-K, we are required to disclose the annual total compensation for both our
Chief Executive Officer and median employee and the ratio of those two amounts. For 2019:
•
•
•
The annual total compensation of our Chief Executive Officer was $4,245,303.
The annual total compensation of our identified median employee was $41,819.
The ratio of the annual total compensation of our Chief Executive Officer to that of our identified median employee was 102 to 1.
We used the same median employee for the pay ratio in 2019 as in 2018. There was no material change in our employee population or in our
employee compensation arrangements or other material change that we reasonably believe would significantly affect our pay ratio calculation.
In addition, there have been no changes in the circumstances of the median employee identified for 2018 that we reasonably believe would
significantly impact our pay ratio disclosure. The methodology we used to identify our median employee for the 2018 pay ratio analysis is
summarized in the following table:
Item
Determination Date
Employee Population
Consistently Applied Compensation
Measure (CACM)
Description
March 31, 2018
Total employee population (excluding the CEO) as of the determination date was
7,626
Gross wages, measured over the twelve-months ending on the determination date.
For new hires, we annualized gross wages for any employees hired during the
twelve-month period ending on March 31, 2018. For non-U.S. employees, values
were converted into U.S. Dollars using the exchange rates in effect on the
determination date
Director Compensation
The following Director Compensation table provides information on the compensation of each director for fiscal 2019. The standard annual
compensation of each director is $175,000. The Audit Committee Chair receives an additional $20,000, the Executive Compensation Committee
Chair receives an additional $15,000 and the Nominating and Governance Committee Chair receives an additional $10,000. Non-chair members
of the Audit Committee receive an additional $8,000 per year, non-chair members of the Executive Compensation Committee receive an additional
$6,000 per year, and non-chair members of the Nominating and Governance Committee receive an additional $4,000 per year due to the
increased workload of these committees. The Chairman of the Board of Directors receives additional annual compensation of $120,000 and is
eligible to participate in the company's health insurance plan. Ms. Owen, the company's CEO, does not receive any additional compensation
for serving on the Board of Directors.
The annual retainer and any chairperson or additional fees (collectively, the "Annual Fee") is payable by one or more of the following means,
as selected by each director: (1) in cash; (2) in shares of our stock valued as of January 15 of each year; (3) credit under the Director Deferred
Compensation Plan described below; (4) stock options valued as of January 15 of each year under the Black-Scholes Valuation Model; or (5)
as a contribution to our company employee scholarship fund. Any director who does not meet the stock ownership guidelines, described below,
must take at least 50 percent of his or her annual fee in one of the permissible forms of equity.
Stock Compensation Plan
Under our 2011 Long-Term Incentive Plan, nonemployee directors may be granted options to purchase shares of our stock if they elect to receive
their compensation in stock options. Subject to certain exceptions, options are not exercisable prior to the first anniversary of the award date
and expire 10 years after the date of the grant. The option price is payable upon exercise in cash or, subject to certain limitations, in shares of
our stock already owned by the optionee, or a combination of shares and cash.
Deferred Compensation Plan
We also maintain a Non-employee Officer and Director Deferred Compensation Stock Purchase Plan. The Plan permits a participant to defer
receipt of all or a portion of his or her Annual Fee to his or her deferred account. Each account is credited with a number of units equal to a
number of shares of the investment selected by the director including company stock and other investment alternatives. The initial value of the
deferral is equal to the dollar amount of the deferral, divided by the per share fair market value of the selected investment at the time of the
deferral. The units are credited with any dividends paid on the investment. The company maintains a Rabbi-Trust relating to obligations under
this plan.
Herman Miller, Inc., and Subsidiaries 45
Director Compensation (continued)
Stock Ownership Guidelines
Director stock ownership guidelines have been in effect since 1997. These guidelines, like those applicable to the management team, are
intended to reinforce the importance of linking shareholder and director interests. Under these guidelines each director is encouraged to reach
a minimum level of share ownership having a value of at least three times the annual director retainer over a five-year period after first becoming
a director.
Other
Directors are reimbursed for travel and other necessary business expenses incurred in the performance of their services for the company, and
they are covered under the company's business travel insurance policies and under the Director and Officer Liability Insurance Policy.
Perquisites
Some directors' spouses accompany them to Board meetings. The company pays for their expenses and for some amenities for the Directors
and their spouses, including some meals and social events. The total of these perquisites is less than $10,000 per Director. Directors are
approved to purchase company products under employee discount pricing. The value of this perquisite was less than $10,000 for all but three
Directors as to whom the value has been included in All Other Compensation in the Director Compensation Table.
Director Compensation Table
Name
Mary Vermeer Andringa
David A. Brandon
Douglas D. French
J. Barry Griswell
John R. Hoke III
Lisa A. Kro
Heidi J. Manheimer
Michael C. Smith
Michael A. Volkema
Fees Earned or Paid in
Cash ($)(1)
Stock Awards ($)(2)
All Other
Compensation ($)(3)
85,000
190,000
181,000
183,000
179,000
155,000
90,500
75,000
295,000
100,000
—
—
—
—
40,000
90,500
108,000
—
—
15,340
11,925
—
—
—
—
—
50,854
Total ($)
185,000
205,340
192,925
183,000
179,000
195,000
181,000
183,000
345,854
(1) The amounts shown in the “Fees Earned or Paid in Cash” column include amounts that may be deferred under the Non-employee Officer and Director Deferred Compensation Plan. Amounts deferred
are retained as units associated with hypothetical investments under the plan. The plan permits non-employee directors to elect to defer amounts that they would otherwise receive as director fees.
Directors at the time of deferral elect the deferral period. These amounts may also reflect contributions to the Michael Volkema Scholarship fund which awards college scholarships to children of
employees. During fiscal 2019, nine of the directors who received fees contributed a portion to the fund.
(2) Amounts represent the aggregate grant date fair value of stock awards computed in accordance with FASB ASC Topic 718. The assumptions used in calculating these amounts are set forth in the
company's consolidated financial statements for the fiscal year ended June 1, 2019, included in our Annual Report on Form 10-K.
(3) Represents value received on product purchases under employee discount program.
As of June 1, 2019, no member of the Board of Directors had outstanding stock options.
46 2019 Proxy Statement
Equity Compensation Plan Information
As noted in the Compensation Discussion and Analysis, we maintain certain equity compensation plans under which common stock is authorized
for issuance to employees and directors in exchange for services. We maintain our 2011 Long-Term Incentive Plan (LTI Plan) and Employees'
Stock Purchase Plan.
The following table sets forth certain information regarding the above referenced equity compensation plans as of June 1, 2019.
Plan Category
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities remaining
available for future issuance under
equity compensation plans (excluding
securities reflected in column (a))(1)
(a)
Equity compensation plans approved by security holders
1,427,909 $
32.2333
Equity compensation plans not approved by security holders
—
—
Total
1,427,909 $
32.2333
2,920,715
2,920,715
(1) The number of shares that remain available for future issuance under our plans is 2,920,715 which includes 2,259,658 under the Long-Term Incentive Plan and 661,058 under
the Employees' Stock Purchase Plan.
Section 16(a) Beneficial Ownership Reporting Compliance
Our directors and officers, as well as any person holding more than 10 percent of our common stock, are required to report initial statements
of ownership of our securities and changes in such ownership to the SEC. Based upon written representations by each director and officer, all
the reports were timely filed by such persons during the last fiscal year.
Certain Relationships and Related Party Transactions
The Board of Directors has adopted a written policy on Related Party Transactions. Under that policy, with certain limited exceptions, all proposed
transactions between the company and any directors or officers or their respective affiliates are required to be reported to the Nominating and
Governance Committee prior to entering such a transaction. Management is obligated to provide the Nominating and Governance Committee
with information relating to the terms and conditions of the proposed transaction, how it complies with the policy, and if the proposed transaction
is with a director, advise the Nominating and Governance Committee if the transaction would impact that director's status as an independent
director. The Nominating and Governance Committee has the authority to determine whether the proposed transaction is exempt from approval
or, if not, whether to approve the transaction as compliant with the policy or refer the matter to the Board of Directors. All approved or exempted
transactions must be reported by the Nominating and Governance Committee to the full Board of Directors.
To approve a transaction under the policy, the Nominating and Governance Committee must determine that either (1) the dollar amount of the
transaction and other transactions with the director during that year is less than $100,000 and, for any director that is a member of the Audit
Committee, does not constitute a proscribed consulting, advisory, or other compensated fee, or (2) if the proposed transaction is for the acquisition
of products or services and is less than $100,000 or is subject to a bid process involving three or more competing parties, and the transaction
is in the best interest of the company and its shareholders, provided that (a) management determined that the proposed transaction will provide
the best value for the company, (b) the compensation is consistent with the proposals submitted by the other bidders, and (c) the director did
not directly participate in the proposal process.
Herman Miller, Inc., and Subsidiaries 47
Reconciliation of Non-GAAP Financial Measures
This report contains references to adjusted earnings per share ("EPS"), organic net sales, adjusted operating earnings and adjusted EBITDA,
all of which are non-GAAP financial measures (referred to collectively as the "Adjusted financial measures").
Adjusted Earnings per Share, Adjusted operating earnings, and Adjusted EBITDA are calculated excluding the impact from the adoption of U.S.
Tax Reform, an investment fair value adjustment, amortization of an inventory step up on the HAY equity method investment, restructuring
expenses, and other special charges, including related taxes. Restructuring expenses include actions involving facilities consolidation, targeted
workforce reductions and costs associated with an early retirement program. Special charges include costs related to the CEO transition, certain
business structure realignment costs, and third party consulting costs related to the Company's profit enhancement initiatives.
Organic net sales represents the change in sales excluding currency translation effects, the divestiture of owned dealers, the impact of the
adoption of the new revenue recognition standard, and the impact of the change in DWR shipping terms in fiscal 2018 .
The Company presents the Adjusted financial measures because we consider them to be important supplemental measures of our performance
and believe them to be useful in analyzing ongoing results from operations. The adjusted financial measures are not measurements of our
financial performance under GAAP and should not be considered an alternative to Earnings per share - diluted, or the Company's reported Net
sales under GAAP. The Adjusted financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute
for analysis of the Company's results as reported under GAAP. The Company's presentation of the Adjusted financial measures should not be
construed as an indication that its future results will be unaffected by unusual or infrequent items. The Company compensates for these limitations
by providing prominence of the GAAP results and using the Adjusted financial measures only as a supplement.
The following table reconciles EPS to Adjusted EPS for the fiscal years indicated:
Earnings per Share - Diluted
Less: Adjustments relating to adopting U.S. Tax Cuts and Job Acts
Less: Investment fair value adjustment, after tax
Add: Special charges, after tax
Add: Inventory step-up on HAY equity method investment, after tax
Add: Restructuring expenses, after tax
Adjusted Earnings Per Share - Diluted
June 1, 2019
June 2, 2018
$
2.70 $
2.12
(0.02)
(0.03)
0.18
0.01
0.13
$
2.97 $
(0.05)
—
0.16
—
0.07
2.30
Weighted average shares outstanding (used for calculating Adjusted Earnings per share)
59,381,791
60,311,305
The following table reconciles Net Sales to Organic net sales by segment for the fiscal years ended:
Net Sales, as reported
% change from PY
Proforma Adjustments
Dealer divestitures
Currency translation effects (1)
Impact of Revenue Recognition Adoption
Impact of Change in DWR Shipping Terms
Organic net sales
% change from PY
June 1, 2019
June 2, 2018
North
America
$ 1,686.5
International
Retail
Total
$
492.2
$
388.5
$ 2,567.2
North
America
$ 1,589.8
International
Retail
Total
$
434.5
$
356.9
$ 2,381.2
6.1%
13.3%
8.9%
7.8%
—
3.8
—
—
—
12.4
—
—
—
0.3
—
—
—
16.5
—
—
(0.8)
—
23.9
—
—
—
12.3
—
—
—
—
(5.0)
(0.8)
—
36.2
(5.0)
$ 1,690.3
$
504.6
$
388.8
$ 2,583.7
$ 1,612.9
$
446.8
$
351.9
$ 2,411.6
4.8%
12.9%
10.5%
7.1%
(1) Currency translation effects represent the estimated net impact of translating current period sales using the average exchange rates applicable to the comparable prior year
period.
48 2019 Proxy Statement
Reconciliation of Non-GAAP Financial Measures (continued)
The following table reconciles Operating earnings to Adjusted operating earnings by segment for the fiscal years ended:
Operating earnings (loss)
June 1, 2019
June 2, 2018
North
America
$ 189.7
International
Retail
Corporate
Total
North
America
International
Retail
Corporate
Total
$
57.8
$
5.3
$
(49.3) $ 203.5
$
175.2 $
36.9 $
13.9 $
(47.1) $ 178.9
% Net sales
11.2%
11.7%
1.4%
7.9%
11.0%
8.5%
3.9%
7.5%
Add: Special charges
Add: Restructuring expenses
0.6
7.7
0.2
2.5
Adjusted operating earnings (loss)
$ 198.0
$
60.5
$
0.8
—
6.1
11.5
—
13.1
10.2
—
1.8
2.5
3.9
—
—
11.3
13.8
5.7
$
(37.8) $ 226.8
$
177.0 $
43.3 $
13.9 $
(35.8) $ 198.4
% Net Sales
8.8%
8.3%
The following table reconciles Current Year Net Income to Adjusted EBITDA used for the Annual Executive Incentive Cash Bonus Plan:
(Dollars In millions)
Current Year Net Income Attributable to HMI
$
Standard Add Backs:
Interest Expense
Income Taxes
Depreciation and Amortization
EBITDA
Standard Adjustments per Guidelines:
Amortization of previously excluded restructuring
Amortization of third party consulting costs
Non-Standard Adjustments Requiring Approval:
Restructuring expense
Third party consulting costs, net of amortization
Costs associated with the CEO transition plan
Non-cash investment gain
Adjusted EBITDA
$
Fiscal Year Ended
June 1, 2019
160.5
12.1
39.6
72.1
284.3
(3.4)
(11.3)
12.3
6.5
4.5
(2.1)
290.8
Herman Miller, Inc., and Subsidiaries 49
Submission of Shareholder Proposals for the 2020 Annual Meeting
Shareholders wishing to submit proposals on matters appropriate for shareholder action to be presented at our 2020 Annual Meeting of
Shareholders and to be included in our proxy materials for that meeting may do so in accordance with Rule 14a-8 promulgated under the
Exchange Act, whereby (1) all applicable requirements of Rule 14a-8 must be satisfied, (2) the notice must include various stock ownership and
related information detailed in our Bylaws, and (3) such proposals must be received by us at our principal executive offices at 855 East Main
Avenue, PO Box 302, Zeeland, Michigan 49464-0302, not earlier than the close of business on the one hundred twentieth (120th) day and not
later than the close of business on the ninetieth (90th) day, prior to the first anniversary of the preceding year’s annual meeting.
Our bylaws, which are available on our website at www.hermanmiller.com/bylaws, contain certain procedural requirements that shareholders
must follow to nominate a person for election as a director at an annual meeting or to bring an item of business before the annual meeting.
These procedures require that notice of an intention to nominate a person for election to the Board and/or to bring an item of business before
our 2020 annual meeting must be received in writing by our Corporate Secretary at 855 East Main Avenue, PO Box 302, Zeeland, Michigan
49464-0302 no earlier than April 16, 2020 and no later than May 16, 2020. The notice must contain certain information about the shareholder
making the proposal for nomination, including a representation that the shareholder intends to appear in person or by proxy at the annual meeting
to nominate the person named in the notice or bring the item of business before the meeting, and about the nominee and/or the item of business
and, in the case of a nomination, must be accompanied by a written consent of the proposed nominee to be named as a nominee and to serve
as a director, if elected. We did not receive any proposals to be presented at the 2019 Annual Meeting.
Miscellaneous
The cost of the solicitation of proxies will be borne by us. In addition to the use of the mails, proxies may be solicited personally or by telephone
or electronic means by a few of our regular employees. We may reimburse brokers and other people holding stock in their names or in the
names of nominees for their expenses in sending proxy materials to the principals and obtaining their proxies.
Our mailing for the fiscal year ended June 1, 2019, includes the Notice Regarding the Availability of Proxy Materials. A copy of the Notice of
2019 Annual Meeting of Shareholders and the 2019 Form 10-K (Annual Report) as well as the Proxy Statement, both filed with the SEC, are
available, without charge, upon written request from the Secretary of the Company, 855 East Main Avenue, PO Box 302, Zeeland, Michigan
49464-0302.
Shareholders are urged to vote promptly. Questions related to your registered holdings can be directed as follows:
Computershare Investor Services, LLC, 250 Royall Street, Canton, Massachusetts 02021 Phone: 1-866-768-5723 inside the United States
Phone: 1-781-575-2723 outside the United States http://www.computershare.com
By Order of the Board of Directors
Jacqueline H. Rice, General Counsel and Acting Secretary
September 3, 2019
50 2019 Proxy Statement
© 2019 Herman Miller, Inc., Zeeland, Michigan Printed in U.S.A. please recycle
® Herman Miller,
subsidiaries
All other trademarks are the property of their respective owners
, Design Within Reach, Geiger, Maharam and Nemschoff are among the trademarks of Herman Miller, Inc., and its
Annual Report
Y 9
Herman Miller, Inc. and Subsidiaries
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[ X ]
[__]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 1, 2019
Commission File No. 001-15141
Herman Miller, Inc.
(Exact name of registrant as specified in its charter)
Michigan
(State or other jurisdiction of incorporation or organization)
38-0837640
(I.R.S. Employer Identification No.)
855 East Main Avenue
PO Box 302
Zeeland, Michigan
(Address of principal executive offices)
Registrant's telephone number, including area code: (616) 654 3000
Securities registered pursuant to Section 12(b) of the Act:
49464-0302
(Zip Code)
Title of each class
Common stock
Trading Symbol(s)
Name of each exchange on which registered
MLHR
NASDAQ-Global Select Market System
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [ X ] No [__]
Yes [__] No [ X ]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [ X ] No [__]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files).
Yes [ X ] No [__]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” "accelerated filer," "smaller reporting company," and “emerging growth
company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [ X ] Accelerated Filer [__] Non-accelerated Filer [__] Smaller Reporting Company [__] Emerging Growth Company [__]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act
[__]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
The aggregate market value of the voting stock held by “nonaffiliates” of the registrant (for this purpose only, the affiliates of the registrant have been
assumed to be the executive officers and directors of the registrant and their associates) as of December 1, 2018, was $1,970,278,315 (based on
$33.65 per share which was the closing sale price as reported by NASDAQ).
The number of shares outstanding of the registrant's common stock, as of July 25, 2019: Common stock, $.20 par value - 59,060,397 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on October 14, 2019, are incorporated into Part
III of this report.
Yes [__] No [ X ]
Herman Miller, Inc. Form 10-K
Table of Contents
Part I
Item 1 Business
Item 1A Risk Factors
Item 1B Unresolved Staff Comments
Item 2 Properties
Item 3 Legal Proceedings
Additional Item: Executive Officers of the Registrant
Item 4 Mine Safety Disclosures
Part II
Item 5 Market for the Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Item 6 Selected Financial Data
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A Quantitative and Qualitative Disclosures about Market Risk
Item 8 Financial Statements and Supplementary Data
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
Item 9A Controls and Procedures
Item 9B Other Information
Part III
Item 10 Directors, Executive Officers, and Corporate Governance
Item 11 Executive Compensation
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13 Certain Relationships and Related Transactions, and Director Independence
Item 14 Principal Accountant Fees and Services
Part IV
Item 15 Exhibits and Financial Statement Schedule
Item 16 Form 10-K Summary
Exhibit Index
Signatures
Schedule II Valuation and Qualifying Accounts
Page No.
2
5
10
11
12
12
13
14
16
17
37
39
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88
89
90
91
92
93
94
95
96
97
100
101
Item 1 Business
General Development of Business
PART I
Herman Miller's mission statement is Inspiring Designs to Help People Do Great Things. To this end, the Company researches, designs,
manufactures, and distributes interior furnishings for use in various environments including office, healthcare, educational, and residential settings
and provides related services that support organizations and individuals all over the world. Through research, the Company seeks to understand,
define and clarify customer needs and problems existing in its markets and to design products, systems and services that serve as innovative
solutions to such needs and problems. The Company's products are sold primarily through the following channels: Owned and independent
contract furniture dealers, direct customer sales, owned and independent retailers, direct-mail catalogs, and the Company's online stores.
The Company was incorporated in Michigan in 1905. The global design leader has since established Herman Miller Group, a family of brands
that collectively offers a variety of products for environments where people live, learn, work, and heal. The family of brands includes Herman
Miller®, Design Within Reach®, Geiger®, Maharam®, Nemschoff®, Colebrook Bosson Saunders®, naughtone®, Maars® Living Walls, and
HAY®. Herman Miller's corporate offices are located at 855 East Main Avenue, PO Box 302, Zeeland, Michigan, 49464-0302, and its telephone
number is (616) 654-3000. Unless otherwise noted or indicated by the context, all references to "Herman Miller," "we," "our," "Company" and
similar references are to Herman Miller, Inc., its predecessors, and controlled subsidiaries. Further information relating to principles of
consolidation is provided in Note 1 to the Consolidated Financial Statements included in Item 8 of this report.
Financial Information about Segments
Information relating to segments is provided in Note 14 to the Consolidated Financial Statements included in Item 8 of this report.
Narrative Description of Business
The Company's principal business consists of the research, design, manufacture, selling and distribution of seating products, office furniture
systems, other freestanding furniture elements, textiles, home furnishings and related services.
The Company's ingenuity and design excellence create award-winning products and services, which have made the Company a leader in the
design and development of furniture, furniture systems, textiles and technology solutions. This leadership is exemplified by the innovative
concepts introduced by the company in its broad array of seating products (including Embody®, Aeron®, Mirra2™, Setu®, Sayl®, Verus®,
Cosm®, Lino®, Verus®, Celle®, Equa®, Taper™ and Ergon® office chairs) and modular systems (including Canvas Office Landscape®, Locale®,
Public Office Landscape®, Layout Studio®, Action Office®, Ethospace®, Arras®, Prospect®, Overlay™ and Resolve®). The company also
offers storage (including Meridian® and Tu® products), wood casegoods (including Geiger® products), freestanding furniture products (including
Abak™, Intent®, Sense™ and Envelop®), healthcare products (including Palisade™, Compass™, Nala®, Ava® and other Nemschoff®
products), the Thrive portfolio of ergonomic solutions, ergonomic and technology support products (including Colebrook Bosson Saunders®
products) and the textiles of Maharam Fabric Corporation (Maharam®). The Live Platform™ system of cloud-connected furnishings, applications
and dashboards provides data-enabled solutions for the Company's customers.
The Company also offers products for residential settings, including Eames®, Eames (lounge chair configuration)®, Eames (management chair
configuration)®, Eames Soft Pad™, HAY®, Nelson™ basic cabinet series, Nelson™ end table, Nelson™ lanterns, Nelson™ marshmallow sofa,
Nelson™ miniature chests, Nelson™ platform bench, Nelson™ swag leg group, Nelson™ tray table, Bubble Lamps®, Airia™, Ardea®, Bumper™,
Burdick Group™, Everywhere™ tables, Claw™, Caper®, Distil™, Envelope™, Formwork®, Full Round™, H Frame™, I Beam™, Landmark™,
Logic Mini™, Logic Power Access Solutions™, Renew™, Rolled Arm™, Scissor™, Sled™, Soft Pad™, Swoop™, Tone™, Twist™, Ward
Bennett™ and Wireframe™.
The Company's products are marketed worldwide by its own sales staff, independent dealers and retailers, its owned dealers, via its e-commerce
websites and through its owned Design Within Reach ("DWR") and HAY retail studios. Salespeople work with dealers, the architecture and
design community, and directly with end-users. Independent dealerships concentrate on the sale of Herman Miller products and some
complementary product lines of other manufacturers. It is estimated that approximately 69 percent of the Company's sales in the fiscal year
ended June 1, 2019, were made to or through independent dealers. The remaining sales were made directly to end-users, including federal,
state and local governments and several business organizations by the Company's own sales staff, its owned dealer network, its retail channels
or independent retailers.
The Company is a recognized leader within its industry for the use, development and integration of customer-centered technologies that enhance
the reliability, speed and efficiency of our customers' operations. This includes proprietary sales tools, interior design and product specification
software; order entry and manufacturing scheduling and production systems; and direct connectivity to the Company's suppliers.
2 2019 Annual Report
The Company's furniture systems, seating, freestanding furniture, storage, casegood and textile products, and related services are used in (1)
institutional environments including offices and related conference, lobby, and lounge areas and general public areas including transportation
terminals; (2) health/science environments including hospitals, clinics and other healthcare facilities; (3) industrial and educational settings; and
(4) residential and other environments.
Raw Materials
The Company's manufacturing materials are available from a significant number of sources within North America, South America, Europe and
Asia. To date, the Company has not experienced any difficulties in obtaining its raw materials. The costs of certain direct materials used in the
Company's manufacturing and assembly operations are sensitive to shifts in commodity market prices. In particular, the costs of steel, plastic,
aluminum components and particleboard are sensitive to the market prices of commodities such as raw steel, aluminum, crude oil, lumber and
resins. Increases in the market prices for these commodities can have an adverse impact on the Company's profitability. Further information
regarding the impact of direct material costs on the Company's financial results is provided in Management's Discussion and Analysis in Item
7 of this report, "Management's Discussion and Analysis of Financial Condition and Results of Operations”.
Patents, Trademarks, Licenses, Etc.
The Company has active utility and design patents in the United States. Many of the inventions covered by these patents also have been
patented in a number of foreign countries. Various trademarks, including the name and stylized “Herman Miller” and the “Herman Miller Circled
Symbolic M” trademark are registered in the United States and many foreign countries. The Company does not believe that any material part
of its business depends on the continued availability of any one or all of its patents or trademarks, or that its business would be materially
adversely affected by the loss of any such marks, except for the following trademarks: Herman Miller®, Herman Miller Circled Symbolic M®,
Maharam®, Geiger®, Design Within Reach®, DWR®, Nemschoff®, Action Office®, Living Office®, Ethospace®, Aeron®, Mirra®, Embody®,
Setu®, Sayl®, Cosm®, Eames®, PostureFit®, Meridian®, and Canvas Office Landscape®.
Working Capital Practices
Information concerning the Company's inventory levels relative to its sales volume can be found under the Executive Overview section in Item
7 of this report “Management's Discussion and Analysis of Financial Condition and Results of Operations”. Beyond this discussion, the Company
does not believe that it or the industry in general has any special practices or special conditions affecting working capital items that are significant
for understanding the Company's business.
Customer Base
The Company estimates that no single dealer accounted for more than 5 percent of the Company's net sales in the fiscal year ended June 1,
2019. The Company estimates that the largest single end-user customer accounted for $129.6 million, $109.8 million and $102.3 million of the
Company's net sales in fiscal 2019, 2018, and 2017, respectively. This represents approximately 5 percent of the Company's net sales in fiscal
2019, 2018 and 2017. The Company's 10 largest customers in the aggregate accounted for approximately 18 percent, 19 percent, and 18
percent of net sales in fiscal 2019, 2018, and 2017, respectively.
Backlog of Unfilled Orders
As of June 1, 2019, the Company's backlog of unfilled orders was $394.2 million. At June 2, 2018, the Company's backlog totaled $350.7 million.
It is expected that substantially all the orders forming the backlog at June 1, 2019, will be filled during the next fiscal year. Many orders received
by the Company are reflected in the backlog for only a short period while other orders specify delayed shipments and are carried in the backlog
for up to one year. Accordingly, the amount of the backlog at any particular time does not necessarily indicate the level of net sales for a particular
succeeding period.
Government Contracts
Other than standard provisions contained in contracts with the United States Government, the Company does not believe that any significant
portion of its business is subject to material renegotiation of profits or termination of contracts or subcontracts at the election of various government
entities. The Company sells to the U.S. Government both through a General Services Administration ("GSA") Multiple Award Schedule Contract
and through competitive bids. The GSA Multiple Award Schedule Contract pricing is principally based upon the Company's commercial price
list in effect when the contract is initiated, rather than being determined on a cost-plus-basis. The Company is required to receive GSA approval
to apply list price increases during the term of the Multiple Award Schedule Contract period.
Competition
All aspects of the Company's business are highly competitive. From an office furniture perspective, the Company competes largely on design,
product and service quality, speed of delivery and product pricing. Although the Company is one of the largest office furniture manufacturers in
the world, it competes with manufacturers that have significant resources and sales as well as many smaller companies. The Company's most
significant competitors are Haworth, HNI Corporation, Kimball International, Knoll and Steelcase.
Herman Miller, Inc. and Subsidiaries 3
The Company also competes in the home furnishings industry, primarily against national, regional and independent home furnishings retailers
who market high-craft furniture to end-user customers and the interior design community. These competitors include companies such as
Restoration Hardware and Wayfair. Similar to its office furniture product offerings, the Company competes primarily on design, product and
service quality, speed of delivery and product pricing in this consumer market.
Research, Design and Development
The Company believes it draws great competitive strength from its research, design and development programs. Through research, the Company
seeks to understand, define and clarify customer needs and problems they are trying to solve. The Company designs innovative products and
services that address customer needs and solve their problems. The Company uses both internal and independent research resources and
independent design resources. Exclusive of royalty payments, the Company spent approximately $58.8 million, $57.1 million and $58.6 million
on research and development activities in fiscal 2019, 2018 and 2017, respectively. Generally, royalties are paid to designers of the Company's
products as the products are sold and are included in the Design and Research line item within the Consolidated Statements of Comprehensive
Income.
Environmental Matters
For over 50 years, respecting the environment has been more than good business practice for the Company - it is the right thing to do. The
Company's 10-year sustainability strategy - Earthright - begins with three principles: positive transparency, products as living things and becoming
greener together. The Company's goals are focused around the smart use of resources, eco-inspired design and being community driven. Based
on current facts known to management, the Company does not believe that existing environmental laws and regulations have had or will have
any material effect upon the capital expenditures, earnings or competitive position of the Company. However, there can be no assurance that
environmental legislation and technology in this area will not result in or require material capital expenditures or additional costs to our
manufacturing process.
Human Resources
The Company considers its employees to be another of its major competitive strengths. The Company stresses individual employee participation
and incentives, believing that this emphasis has helped attract and retain a competent and motivated workforce. The Company's human resources
group provides employee recruitment, education and development, as well as compensation planning and counseling. Additionally, there have
been no work stoppages or labor disputes in the Company's history. As of June 1, 2019, approximately 5 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.
As of June 1, 2019, the Company had approximately 8,000 employees, representing a 4 percent increase as compared with June 2, 2018. In
addition to its employee workforce, the Company uses temporary labor to meet uneven demand in its manufacturing operations.
Information about International Operations
The Company's sales in international markets are made primarily to office/institutional customers. Foreign sales consist mostly of office furniture
products such as Aeron®, Mirra®, Sayl®, Setu®, Layout Studio®, Imagine Desking System®, Ratio®, other seating and storage products and
ergonomic accessories such as the Flo® monitor arm. The Company conducts business in the following major international markets: Canada,
Europe, the Middle East, Africa, Latin America and the Asia/Pacific region.
The Company's products currently sold in international markets are manufactured by wholly owned subsidiaries in the United States, the United
Kingdom, China, Brazil and India. Sales are made through wholly owned subsidiaries or branches in Canada, Japan, Korea, Mexico, Australia,
Singapore, China (including Hong Kong), India and Brazil. The Company's products are offered in Canada, Europe, the Middle East, Africa,
Latin America and the Asia/Pacific region through dealers.
Additional information with respect to operations by geographic area appears in Note 14 of the Consolidated Financial Statements included in
Item 8 of this report. Fluctuating exchange rates and factors beyond the control of the Company, such as tariff and foreign economic policies,
may affect future results of international operations. Refer to Item 7A, Quantitative and Qualitative Disclosures about Market Risk, for further
discussion regarding the Company's foreign exchange risk.
Available Information
The Company's annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports
are made available free of charge through the “Investors” section of the Company's internet website at www.hermanmiller.com, as soon as
practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (SEC). The Company's filings
with the SEC are also available for the public to read via the SEC's internet website at www.sec.gov. You may read and copy any materials we
file with the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330.
4 2019 Annual Report
Item 1A Risk Factors
The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. The risks and
uncertainties described below are not the only ones we face; others, either unforeseen or currently deemed less significant, may also have a
negative impact on our Company. If any of the following occurs, our business, operating results, cash flows, and financial condition could be
materially adversely affected.
We may not be successful in implementing and managing our growth strategy.
We have established a growth strategy for the business based on a changing and evolving world. Through this strategy we are focused on
taking advantage of the changing composition of the office floor plate, the greater desire for customization from our customers, new technologies
and trends towards urbanization.
To that end, we intend to grow in certain targeted ways. First, we will unlock the power of One Herman Miller by building an agile, collaborative,
globally-connected organization fit for continuous evolution. This will also include simplifying and tailoring our go-to-market approach, as well
as continuing to lead in product innovation across all businesses. Second, we intend to build a customer-centric, digitally enabled business
model by leveraging our deep understanding of customer journeys to deliver inspired products and frictionless customer experiences. Inclusive
of this will be to drive step-change in our data, analytics, marketing, and brand capabilities, as well as to strengthen our core technology backbone.
Third, we intend to accelerate profitable growth by strengthening and evolving our core contract business, driving outsized growth in our
international business, and expanding our retail business. Finally, we believe it is a business imperative to reinforce our commitment to our
people, planet and communities in a more integrated way than ever before. Beyond simply being the right thing to do, we are confident that
elevating our focus on positive social and environmental business practices will positively impact our customers and enhance returns for our
shareholders over the long term.
While we have confidence that our strategic plan reflects opportunities that are appropriate and achievable and that we have anticipated and
will manage the associated risks, there is the possibility that the strategy may not deliver the projected results due to inadequate execution,
incorrect assumptions, sub-optimal resource allocation, or changing customer requirements.
To meet these goals, we believe we will be required to continually invest in the research, design, and development of new products and services,
and there is no assurance that such investments will have commercially successful results.
Certain growth opportunities may require us to invest in acquisitions, alliances, and the startup of new business ventures. These investments,
if available, may not perform according to plan and may involve the assumption of business, operational, or other risks that are new to our
business.
Future efforts to expand our business within developing economies, particularly within China and India, may expose us to the effects of political
and economic instability. Such instability may impact our ability to compete for business. It may also put the availability and/or value of our capital
investments within these regions at risk. These expansion efforts expose us to operating environments with complex, changing, and in some
cases, inconsistently-applied legal and regulatory requirements. Developing knowledge and understanding of these requirements poses a
significant challenge and failure to remain compliant with them could limit our ability to continue doing business in these locations.
Pursuing our strategic plan in new and adjacent markets, as well as within developing economies, will require us to find effective new channels
of distribution. There is no assurance that we can develop or otherwise identify these channels of distribution.
Tariffs imposed by the U.S. government could have a material adverse effect on our results of operations.
The imposition of tariffs by the U.S. government on various products imported from certain countries, as well as countering tariffs on the export
of U.S. goods, has and will likely continue to adversely impact the cost of certain of our raw materials and finished goods as well as products
that we export to other countries. Accordingly, these tariffs and the possibility of broader trade conflicts stemming from the tariffs could negatively
impact our business in the future. The tariffs on imports, most notably imports from China, also impacted the cost of steel in fiscal year 2019, a
key commodity that we consume in producing products. Given the significance of steel costs to our direct materials costs, we are closely
monitoring escalating trade tensions between the U.S. and China. That said, the potential impact to our direct material costs due to tariffs on
Chinese imports is somewhat limited, as purchases of direct materials (mainly component parts and products manufactured by third parties)
from China represented an estimated 5% of our consolidated cost of sales for fiscal 2019. Going forward, continued or increased tariffs could
negatively impact our gross margin and operating performance. These factors also have the potential to significantly impact global trade and
economic conditions in many of the regions where we do business.
Herman Miller, Inc. and Subsidiaries 5
Adverse economic and industry conditions could have a negative impact on our business, results of operations, and financial condition.
Customer demand within the contract office furniture industry is affected by various macro-economic factors; general corporate profitability,
service sector employment levels, new office construction rates, and existing office vacancy rates are among the most influential factors. History
has shown that declines in these measures can have an adverse effect on overall office furniture demand. Additionally, factors and changes
specific to our industry, such as developments in technology, governmental standards and regulations, and health and safety issues can influence
demand. There are current and future economic and industry conditions that could adversely affect our business, operating results, or financial
condition.
Other macroeconomic developments, such as the United Kingdom referendum on European Union membership (commonly known as Brexit)
could negatively affect the Company's ability to conduct business in those geographies. The current political and economic uncertainty relating
to Brexit brings caution to the Company’s customer base as capital investments are potentially put on hold pending the outcome of the negotiations.
Furthermore, concerns exist relating to potential tariffs and customs regulations and the potential for short term logistics disruption as any such
changes are implemented. This will impact both the Company's suppliers and customers, including distributors, and could result in product
delays and inventory issues. Further uncertainty in the marketplace also bring risk to accounts receivable and could result in delays in collection
and greater bad debt expense. There also remains a risk for the value of the British Pound and/or the Euro to further deteriorate, reducing the
purchasing power of customers in these regions and potentially undermining the financial health of the Company's suppliers and customers in
other parts of the world.
The markets in which we operate are highly competitive and we may not be successful in winning new business.
We are one of several companies competing for new business within the furniture industry. Many of our competitors offer similar categories of
products, including office seating, systems and freestanding office furniture, casegoods, storage as well as residential, education and healthcare
furniture solutions. Although we believe that our innovative product design, functionality, quality, depth of knowledge, and strong network of
distribution partners differentiate us in the marketplace, increased market pricing pressure could make it difficult for us to win new business with
certain customers and within certain market segments at acceptable profit margins.
The retail furnishings market is highly competitive. We compete with national and regional furniture retailers and department stores. In addition,
we compete with mail order catalogs and online retailers focused on home furnishings. We compete with these and other retailers for customers,
suitable retail locations, vendors, qualified employees, and management personnel. Some of our competitors have significantly greater financial,
marketing and other resources than we possess. This may result in our competitors being quicker at the following: adapting to changes, devoting
greater resources to the marketing and sale of their products, generating greater national brand recognition, or adopting more aggressive pricing
and promotional policies, including free shipping offers. In addition, increased catalog mailings and/or digital marketing campaigns by our
competitors may adversely affect response rates to our own marketing efforts. As a result, increased competition may adversely affect our future
financial performance.
Our business presence outside the United States exposes us to certain risks that could negatively affect our results of operations
and financial condition.
We have significant manufacturing and sales operations in the United Kingdom, which represents our largest marketplace outside the United
States. We also have manufacturing operations in China, India and Brazil. Additionally, our products are sold internationally through wholly
owned subsidiaries or branches in Canada, Japan, Korea, Mexico, Australia, Singapore, China (including Hong Kong), India and Brazil. The
Company's products are offered in Europe, the Middle East, Africa, Latin America and the Asia/Pacific region through dealers.
Doing business internationally exposes us to certain risks, many of which are beyond our control and could potentially impact our ability to
design, develop, manufacture, or sell products in certain countries. These factors could include, but would not necessarily be limited to:
•
•
•
•
•
•
•
•
•
Political, social, and economic conditions
Global trade conflicts and trade policies
Legal and regulatory requirements
Labor and employment practices
Cultural practices and norms
Natural disasters
Security and health concerns
Protection of intellectual property
Changes in foreign currency exchange rates
In some countries, the currencies in which we import and export products can differ. Fluctuations in the rate of exchange between these currencies
could negatively impact our business and our financial performance. Additionally, tariff and import regulations, international tax policies and
rates, and changes in U.S. and international monetary policies may have an adverse impact on results of operations and financial condition.
6 2019 Annual Report
We are subject to risks and costs associated with protecting the integrity and security of our systems and confidential information.
We collect certain customer-specific data, including credit card information, in connection with orders placed through our e-commerce websites,
direct-mail catalog marketing program, and retail studios. For these sales channels to function and develop successfully, we and other parties
involved in processing customer transactions must be able to transmit confidential information, including credit card information and other
personal information regarding our customers, securely over public and private networks. Third parties may have or develop the technology or
knowledge to breach, disable, disrupt or interfere with our systems or processes or those of our vendors. Although we take the security of our
systems and the privacy of our customers’ personal information seriously and we believe we take reasonable steps to protect the security and
confidentiality of the information we collect, we cannot guarantee that our security measures will effectively prevent others from obtaining
unauthorized access to our information and our customers’ information. The techniques used to obtain unauthorized access to systems change
frequently and are not often recognized until after they have been launched.
Any person who circumvents our security measures could destroy or steal valuable information or disrupt our operations. Any security breach
could cause consumers to lose confidence in the security of our information systems, including our e-commerce websites or retail studios and
choose not to purchase from us. Any security breach could also expose us to risks of data loss, litigation, regulatory investigations, and other
significant liabilities. Such a breach could also seriously disrupt, slow or hinder our operations and harm our reputation and customer relationships,
any of which could harm our business.
A security breach includes a third party wrongfully gaining unauthorized access to our systems for the purpose of misappropriating assets or
sensitive information, loading corrupting data, or causing operational disruption. These actions may lead to a significant disruption of the
Company’s IT systems and/or cause the loss of business and business information resulting in an adverse business impact, including: (1) an
adverse impact on future financial results due to theft, destruction, loss misappropriation, or release of confidential data or intellectual property;
(2) operational or business delays resulting from the disruption of IT systems, and subsequent clean-up and mitigation activities; and (3) negative
publicity resulting in reputation or brand damage with customers, partners or industry peers.
In addition, states and the federal government are increasingly enacting laws and regulations to protect consumers against identity theft. Also,
as our business expands globally, we are subject to data privacy and other similar laws in various foreign jurisdictions. If we are the target of a
cybersecurity attack resulting in unauthorized disclosure of our customer data, we may be required to undertake costly notification procedures.
Compliance with these laws will likely increase the costs of doing business. If we fail to implement appropriate safeguards or to detect and
provide prompt notice of unauthorized access as required by some of these laws, we could be subject to potential fines, claims for damages
and other remedies, which could harm our business.
A sustained downturn in the economy could adversely impact our access to capital.
The disruptions in the global economic and financial markets of the last decade adversely impacted the broader financial and credit markets,
at times reducing the availability of debt and equity capital for the market as a whole. Conditions such as these could re-emerge in the future.
Accordingly, our ability to access the capital markets could be restricted at a time when we would like, or need, to access those markets, which
could have an adverse impact on our flexibility to react to changing economic and business conditions. The resulting lack of available credit,
increased volatility in the financial markets and reduced business activity could materially and adversely affect our business, financial condition,
results of operations, our ability to take advantage of market opportunities and our ability to obtain and manage our liquidity. In addition, the cost
of debt financing and the proceeds of equity financing may be materially and adversely impacted by these market conditions. The extent of any
impact would depend on several factors, including our operating cash flows, the duration of tight credit conditions and volatile equity markets,
our credit capacity, the cost of financing, and other general economic and business conditions. Our credit agreements contain performance
covenants, such as a limit on the ratio of debt to earnings before interest, taxes, depreciation and amortization, and limits on subsidiary debt
and incurrence of liens. Although we believe none of these covenants is currently restrictive to our operations, our ability to meet the financial
covenants can be affected by events beyond our control.
Disruptions in the supply of raw and component materials could adversely affect our manufacturing and assembly operations.
We rely on outside suppliers to provide on-time shipments of the various raw materials and component parts used in our manufacturing and
assembly processes. The timeliness of these deliveries is critical to our ability to meet customer demand. Any disruptions in this flow of delivery
may have a negative impact on our business, results of operations, and financial condition.
Increases in the market prices of manufacturing materials may negatively affect our profitability.
The costs of certain manufacturing materials used in our operations are sensitive to shifts in commodity market prices, include the impact of
the U.S. and retaliatory tariffs previously noted. In particular, the costs of steel, plastic, aluminum components, and particleboard are sensitive
to the market prices of commodities such as raw steel, aluminum, crude oil, lumber, and resins. Increases in the market prices of these
commodities, such as what we experienced earlier in fiscal 2019 for steel, may have an adverse impact on our profitability if we are unable to
offset them with strategic sourcing, continuous improvement initiatives or increased prices to our customers.
Herman Miller, Inc. and Subsidiaries 7
Disruptions within our dealer network could adversely affect our business.
Our ability to manage existing relationships within our network of independent dealers is crucial to our ongoing success. Although the loss of
any single dealer would not have a material adverse effect on the overall business, our business within a given market could be negatively
impacted by disruptions in our dealer network caused by the termination of commercial working relationships, ownership transitions, or dealer
financial difficulties.
If dealers go out of business or restructure, we may suffer losses because they may not be able to pay for products already delivered to them.
Also, dealers may experience financial difficulties, creating the need for outside financial support, which may not be easily obtained. In the past,
we have, on occasion, agreed to provide direct financial assistance through term loans, lines of credit, and/or loan guarantees to certain dealers.
Those activities increase our financial exposure.
We are unable to control many of the factors affecting consumer spending. Declines in consumer spending on furnishings could
reduce demand for our products.
The operations of our Retail segment are sensitive to a number of factors that influence consumer spending, including general economic
conditions, consumer disposable income, unemployment, inclement weather, availability of consumer credit, consumer debt levels, conditions
in the housing market, interest rates, sales tax rates and rate increases, inflation, and consumer confidence in future economic conditions.
Adverse changes in these factors may reduce consumer demand for our products, resulting in reduced sales and profitability.
A number of factors that affect our ability to successfully implement our retail studio strategy, including opening new locations and
closing existing studios, are beyond our control. These factors may harm our ability to increase the sales and profitability of our retail
operations.
Approximately 50 percent of the sales within our Retail segment are transacted within our retail studios. Additionally, we believe our retail studios
have a direct influence on the volume of business transacted through other channels, including our consumer e-commerce and direct-mail
catalog platforms, as many customers utilize these physical spaces to view and experience products prior to placing an order online or through
the catalog call center. Our ability to open additional studios or close existing studios successfully will depend upon a number of factors beyond
our control, including:
•
•
•
•
•
•
•
General economic conditions
Identification and availability of suitable studio locations
Success in negotiating new leases and amending or terminating existing leases on acceptable terms
The success of other retailers in and around our retail locations
Ability to secure required governmental permits and approvals
Hiring and training skilled studio operating personnel
Landlord financial stability
Increasing competition for highly skilled and talented workers could adversely affect our business.
The successful implementation of our business strategy depends, in part, on our ability to attract and retain a skilled workforce. The increasing
competition for highly skilled and talented employees could result in higher compensation costs, difficulties in maintaining a capable workforce,
and leadership succession planning challenges.
Costs related to product defects could adversely affect our profitability.
We incur various expenses related to product defects, including product warranty costs, product recall and retrofit costs, and product liability
costs. These expenses relative to product sales vary and could increase. We maintain reserves for product defect-related costs based on
estimates and our knowledge of circumstances that indicate the need for such reserves. We cannot, however, be certain that these reserves
will be adequate to cover actual product defect-related claims in the future. Any significant increase in the rate of our product defect expenses
could have a material adverse effect on operations.
We are subject to risks associated with self-insurance related to health benefits.
We are self-insured for our health benefits and maintain per employee stop loss coverage; however, we retain the insurable risk at an aggregate
level. Therefore unforeseen or catastrophic losses in excess of our insured limits could have a material adverse effect on the Company’s financial
condition and operating results. See Note 1 of the Consolidated Financial Statements for information regarding the Company’s retention level.
8 2019 Annual Report
Government and other regulations could adversely affect our business.
Government and other regulations apply to the manufacture and sale of many of our products. Failure to comply with these regulations or failure
to obtain approval of products from certifying agencies could adversely affect the sales of these products and have a material negative impact
on operating results.
Herman Miller, Inc. and Subsidiaries 9
Item 1B Unresolved Staff Comments
None
10 2019 Annual Report
Item 2 Properties
The Company owns or leases facilities located throughout the United States and several foreign countries. The location, square footage and
use of the most significant facilities at June 1, 2019 were as follows:
Owned Locations
Zeeland, Michigan
Spring Lake, Michigan
Holland, Michigan
Holland, Michigan
Dongguan, China*
Holland, Michigan
Sheboygan, Wisconsin
Melksham, United Kingdom
Hildebran, North Carolina
Leased Locations
Batavia, Ohio**
Dongguan, China*
Hebron, Kentucky**
Atlanta, Georgia
Bangalore, India
Yaphank, New York
New York City, New York
Hong Kong, China
Brooklyn, New York
Stamford, Connecticut
Square
Footage
770,800
582,800
357,400
293,100
269,000
238,200
207,700
170,000
93,000
Square
Footage
617,600
429,300
423,700
180,200
104,800
92,000
66,600
54,400
39,400
35,300
Use
Manufacturing, Warehouse, Office
Manufacturing, Warehouse, Office
Warehouse
Manufacturing, Office
Manufacturing, Office
Office, Design
Manufacturing, Warehouse, Office
Manufacturing, Warehouse, Office
Manufacturing, Office
Use
Warehouse
Manufacturing, Office
Warehouse
Manufacturing, Warehouse, Office
Manufacturing, Warehouse
Warehouse, Office
Office, Retail
Warehouse
Warehouse, Retail
Office, Retail
As of June 1, 2019, the Company leased 39 retail studios (including 36 operating under the DWR brand, 2 under the HAY brand, and a Herman
Miller Flagship store in New York) that totaled approximately 400,000 square feet of selling space. The Company also maintains administrative
and sales offices and showrooms in various other locations throughout North America, Europe, Asia/Pacific and Latin America. The Company
considers its existing facilities to be in good condition and adequate for its design, production, distribution, and selling requirements.
* On March 14, 2018, the Company announced a facilities consolidation plan related to its China Manufacturing facilities. Plans are underway
to close and consolidate the owned and leased Dongguan facilities into a new leased facility in Dongguan. The Company expects the
facilities consolidation to be completed by the first quarter of fiscal 2020.
** In fiscal 2019, the Company began the transition of its leased Hebron, Kentucky distribution center to a new leased distribution center in
Batavia, Ohio. The Company expects the transition to be completed by the second quarter of fiscal 2020.
Herman Miller, Inc. and Subsidiaries 11
Item 3 Legal Proceedings
The Company is involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the
outcome of such proceedings and litigation currently pending will not materially affect the Company’s consolidated operations, cash flows and
financial condition.
Additional Item: Executive Officers of the Registrant
Certain information relating to Executive Officers of the Company as of June 1, 2019 is as follows:
Name
Andrea R. Owen
Jeremy Hocking
Gregory J. Bylsma
Jeffrey M. Stutz
B. Ben Watson
Jacqueline H. Rice
John McPhee
Kevin Veltman
Jeffrey L. Kurburski
Benjamin P.T. Groom
Leander D. LeSure
Megan Lyon
Year Elected an
Executive Officer Position with the Company
Age
54
58
54
48
54
47
56
44
52
35
53
39
2018
2017
2009
2009
2010
2019
2015
2015
2018
2019
2019
2019
President and Chief Executive Officer
President, International Contract
President, North America Contract
Chief Financial Officer
Chief Creative Officer
General Counsel
President, Retail
Vice President, Investor Relations & Treasurer
Chief Technology Officer
Chief Digital Officer
Chief Human Resource Officer
Chief Strategy Officer
Except as discussed below, each of the named officers has served the Company in an executive capacity for more than five years.
Mr. McPhee joined Herman Miller, Inc. in 2015 in connection with the Company's acquisition of DWR. Prior to that, he served in various roles
at DWR including Chief Operating Officer and President from 2010. Mr. McPhee previously held senior management positions with Edelman
Leather, Candie's, Inc. and Sam & Libby, Inc.
Mr. Veltman joined Herman Miller, Inc. in 2014 and serves as Vice President - Investor Relations and Treasurer. Prior to joining Herman Miller,
he spent 8 years at BISSELL, Inc, most recently as Vice President - Finance.
Ms. Owen joined Herman Miller, Inc. in 2018 and serves as President and Chief Executive Officer. Prior to joining Herman Miller, Ms. Owen
spent twenty-five years at The Gap, Inc. where she most recently served as Global President of Banana Republic.
Mr. Groom joined Herman Miller, Inc. in 2019 and serves as Chief Digital Officer. Prior to joining Herman Miller, Mr. Groom spent six years with
The Boston Consulting Group where he was a Principal member of the firm’s Technology Advantage, Retail and Consumer practices.
Ms. Rice joined Herman Miller, Inc. in 2019 and serves as General Counsel. Prior to joining Herman Miller, Ms. Rice served as Executive Vice
President, Chief Risk & Compliance Officer at Target Corporation as well as Senior Counsel and Chief Compliance Officer at General Motors
Co.
Mr. LeSure joined Herman Miller, Inc. in 2019 and serves as Chief Human Resources Officer. Prior to joining Herman Miller, Mr. LeSure served
as the Chief Human Resources Officer at Getty Images, Inc. He also served in Human Resource Leadership roles at Western Union and
American Express.
Ms. Lyon joined Herman Miller, Inc. in 2019 and serves as Chief Strategy Officer. Prior to joining Herman Miller, Ms. Lyon spent eleven years
with The Boston Consulting Group where she was a Partner and Managing Director leading the firm’s West Coast Consumer and Retail Practice.
There are no family relationships between or among the above-named executive officers. There are no arrangements or understandings between
any of the above-named officers pursuant to which any of them was named an officer.
12 2019 Annual Report
Item 4 Mine Safety Disclosures
Not applicable
Herman Miller, Inc. and Subsidiaries 13
PART II
Item 5 Market for the Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity
Securities
Share Price, Earnings, and Dividends Summary
Herman Miller, Inc. common stock is traded on the NASDAQ-Global Select Market System (Symbol: MLHR). As of July 25, 2019, there were
approximately 33,000 record holders, including individual participants in security position listings, of the Company's common stock.
The high and low market prices of the Company's common stock, dividends and diluted earnings per share for each quarterly period during the
past two years were as follows:
Per Share and Unaudited
Year ended June 1, 2019:
First quarter
Second quarter
Third quarter
Fourth quarter
Year
Year ended June 2, 2018:
First quarter
Second quarter
Third quarter
Fourth quarter
Year
Market
Price
High
(at close)
Market
Price
Low
(at close)
Market
Price
Close
Earnings
Per Share-
Diluted
Dividends
Declared Per
Share
$
$
$
$
40.10
40.65
37.62
39.70
40.65
35.30
37.00
41.84
39.20
41.84
$
$
$
$
32.75
31.38
28.66
33.94
28.66
29.25
32.05
33.65
29.95
29.25
$
$
$
$
38.30 $
33.86
36.89
35.49
35.49 $
34.00 $
34.55
36.75
32.85
32.85 $
0.60 $
0.66
0.66
0.78
2.70 $
0.55 $
0.55
0.49
0.53
2.12 $
0.1975
0.1975
0.1975
0.1975
0.7900
0.1800
0.1800
0.1800
0.1800
0.7200
Dividends were declared and paid quarterly during fiscal 2019 and 2018 as approved by the Board of Directors.
On June 26, 2019 the company's board of directors approved an increase in the quarterly dividend up to $0.21 per share. The payment will be
made on October 15, 2019 to shareholders of record at the close of business on August 31, 2019. While it is anticipated that the Company will
continue to pay quarterly cash dividends, the amount and timing of such dividends is subject to the discretion of the Board depending on the
Company's future results of operations, financial condition, capital requirements and other relevant factors.
Issuer Purchases of Equity Securities
The following is a summary of share repurchase activity during the Company's fourth fiscal quarter ended June 1, 2019:
Period
3/3/19-3/30/19
3/31/19-4/27/19
4/28/19-6/1/19
Total
Total Number of
Shares (or
Units) Purchased
Average Price
Paid per
Share or Unit
Total Number of Shares (or
Units) Purchased as Part of
Publicly Announced Plans
or Programs
Maximum Number (or Approximate
Dollar Value) of Shares (or Units) that
May Yet be Purchased Under the Plans
or Programs (1)
11,253
60,815
47,498
119,566
34.95
36.61
37.56
11,253
60,815
47,498
$
$
$
119,566
268,232,481
266,006,033
264,222,017
(1) Amounts are as of the end of the period indicated
The Company has two share repurchase plans authorized by the Board of Directors on September 25, 2007 and January 16, 2019, which
provide share repurchase authorization of $550.0 million with no specified expiration date. The approximate dollar value of shares available
for purchase under the plans at June 1, 2019 was $264.2 million.
During the period covered by this report, the Company did not sell any shares of common stock that were not registered under the Securities
Act of 1933.
14 2019 Annual Report
Stockholder Return Performance Graph
Set forth below is a line graph comparing the yearly percentage change in the cumulative total stockholder return on the Company's common
stock with that of the cumulative total return of the Standard & Poor's 500 Stock Index and the NASD Non-Financial Index for the five-year period
ended June 1, 2019. The graph assumes an investment of $100 on June 4, 2014 in the Company's common stock, the Standard & Poor's 500
Stock Index and the NASD Non-Financial Index, with dividends reinvested.
Herman Miller, Inc.
S&P 500 Index
NASD Non-Financial
2014
2015
2016
2017
2018
2019
$
$
$
100
100
100
$
$
$
90
110
121
$
$
$
105
109
119
$
$
$
111
127
159
$
$
$
114
142
187
$
$
$
126
143
186
Information required by this item is also contained in Item 12 of this report.
Herman Miller, Inc. and Subsidiaries 15
Item 6 Selected Financial Data
Review of Operations
(In millions, except key ratios and per share data)
Operating Results
Net sales
Gross margin
Selling, general, and administrative (1)
Design and research
Operating earnings
Earnings before income taxes
Net earnings
Net cash provided by operating activities
Net cash used in investing activities
Net cash (used in) provided by financing activities
Depreciation and amortization
Capital expenditures
Common stock repurchased plus cash dividends paid
Key Ratios
Sales growth
Gross margin (2)
Selling, general, and administrative (1) (2)
Design and research (2)
Operating earnings (2)
Net earnings growth (decline)
After-tax return on net sales (3)
After-tax return on average assets (4)
After-tax return on average equity (5)
Share and Per Share Data
Earnings per share-diluted
Cash dividends declared per share
Book value per share at year end (6)
Market price per share at year end
Weighted average shares outstanding-diluted
2019
2018
2017
2016
2015
$ 2,567.2
929.9
649.5
76.9
203.5
195.1
160.5
216.4
(165.0)
(91.9)
72.1
85.8
93.5
$ 2,381.2
873.0
621.0
73.1
178.9
168.1
128.7
166.5
(62.7)
2.5
66.9
70.6
88.9
$
2,278.2
864.2
587.5
73.1
191.1
177.6
124.1
202.1
(116.3)
(74.6)
58.9
87.3
63.1
$ 2,264.9
874.2
585.6
77.1
211.5
196.6
137.5
210.4
(80.8)
(106.5)
53.0
85.1
49.0
$ 2,142.2
791.4
556.6
71.4
163.4
145.2
98.1
167.7
(213.6)
6.8
49.8
63.6
37.0
7.8%
36.2
25.3
3.0
7.9
24.7
6.3
10.5
23.2%
4.5%
36.7
26.1
3.1
7.5
3.7
5.4
9.2
20.6%
0.6%
37.9
25.8
3.2
8.4
(9.7)
5.4
9.8
22.3%
5.7%
38.6
25.9
3.4
9.3
40.2
6.1
11.3
29.1%
$
$
$
2.70
0.79
12.23
35.49
59.4
2.12
0.72
11.22
32.85
60.3
$
2.05
0.68
9.84
32.70
60.6
$
2.26
0.59
8.76
31.64
60.5
13.8%
36.9
26.0
3.3
7.6
543.9
4.6
9.0
25.0%
1.62
0.56
7.04
27.70
60.1
$
$ 1,569.3
215.2
1.5
282.8
719.2
1,002.0
Financial Condition
Total assets
Working capital (7)
Current ratio (8)
Interest-bearing debt and related swap agreements (9)
Stockholders' equity
Total capital (10)
(1) Selling, general, and administrative expenses include restructuring and impairment expenses in years that are applicable.
(2) Shown as a percent of net sales.
(3) Calculated as net earnings divided by net sales.
(4) Calculated as net earnings divided by average assets.
(5) Calculated as net earnings divided by average equity.
(6) Calculated as total stockholders' equity divided by common shares of stock outstanding.
(7) Calculated using current assets less non-interest bearing current liabilities.
(8) Calculated using current assets divided by current liabilities.
(9) Amounts shown include the fair market value of the Company’s interest rate swap arrangement(s). The net fair value of this/these arrangement(s) was/were $0.9 million at
June 1, 2019, $(9.9) million at June 2, 2018, and $(2.1) million at June 3, 2017.
(10) Calculated as interest-bearing debt and related swap agreements plus stockholders' equity.
$ 1,479.5
231.6
1.6
265.1
664.8
929.9
$ 1,235.2
90.5
1.2
221.9
524.7
746.6
$ 1,192.7
110.1
1.3
290.0
420.3
710.3
1,306.3
106.2
1.3
197.8
587.7
785.5
16 2019 Annual Report
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the issues discussed in Management's Discussion and Analysis in conjunction with the Company's Consolidated Financial
Statements and the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K.
Executive Overview
Herman Miller’s mission statement is Inspiring Designs to Help People Do Great Things. At present, most customers come to the Company for
furnishing interior environments in corporate offices, healthcare settings, higher education institutions and residential spaces. The Company's
primary products include furniture systems, seating, storage, freestanding furniture, healthcare environment products, casegoods, textiles and
related technologies and services.
More than 100 years of innovative business practices and a commitment to social responsibility have established Herman Miller as a recognized
global company. The Company trades on the NASDAQ Global Select Market under the symbol MLHR.
Herman Miller's products are sold internationally through wholly-owned subsidiaries or branches in various countries including the United
Kingdom, Canada, Japan, Korea, Mexico, Australia, Singapore, China, Hong Kong, India and Brazil. The Company's products are offered
elsewhere in the world primarily through independent dealerships or joint ventures with customers in over 100 countries.
The Company is globally positioned in terms of manufacturing operations. In the United States, manufacturing operations are located in Michigan,
Georgia, Wisconsin and North Carolina. In Europe, its manufacturing presence is located in the United Kingdom. Manufacturing operations
globally also include facilities located in China, Brazil and India. The Company manufactures products using a system of lean manufacturing
techniques collectively referred to as the Herman Miller Performance System (HMPS). For its contract furniture business, Herman Miller strives
to maintain efficiencies and cost savings by minimizing the amount of inventory on hand. Accordingly, production is order-driven with direct
materials and components purchased as needed to meet demand. The standard manufacturing lead time for the majority of our products is 10
to 20 days. These factors result in a high rate of inventory turns related to our manufactured inventories.
A key element of the Company's manufacturing strategy is to limit fixed production costs by sourcing component parts from strategic suppliers.
This strategy has allowed the Company to increase the variable nature of its cost structure, while retaining proprietary control over those
production processes that the Company believes provide a competitive advantage. As a result of this strategy, the Company's manufacturing
operations are largely assembly-based.
A key element of the Company's growth strategy is to scale the Retail business through the Company's Design Within Reach (DWR), Herman
Miller and HAY retail operations. The Retail business provides a channel to bring Herman Miller's iconic and design-centric products to retail
customers, along with other proprietary and third party products, with a focus on design. The Company continues to transform its Retail business
through the DWR retail studio footprint, which will be complemented by a continued focus on improving margins through the development of
exclusive product designs and leveraging additional sales in DWR's contract, catalog and digital channels, as well as the launch of the HAY
brand in North America.
The Company is comprised of various operating segments as defined by generally accepted accounting principles in the United States (U.S.
GAAP). The operating segments are determined on the basis of how the Company internally reports and evaluates financial information used
to make operating decisions. The Company has identified the following reportable segments:
•
•
•
North America Contract — 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 and Herman Miller Collection
products.
International Contract — Includes the operations associated with the design, manufacture and sale of furniture products, primarily for
work-related settings, in the Europe, Middle East and Africa (EMEA), Latin America and Asia-Pacific geographic regions.
Retail — Includes the operations associated with the sale of modern design furnishings and accessories to third party retail distributors,
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 corporate expenses related to general corporate functions,
including, but not limited to, certain legal, executive, corporate finance, information technology, administrative and acquisition-related costs.
Herman Miller, Inc. and Subsidiaries 17
Core Strengths
The Company relies on the following core strengths in delivering solutions to customers:
•
•
•
•
•
Portfolio of Leading Brands and Products - Herman Miller is a globally-recognized, authentic brand known for working with some of
the most well known and respected designers in the world. Over the years, it has evolved into Herman Miller Group, a family of brands
that collectively offers a variety of products for environments where people live, learn, work and heal. Within the industries in which
the Company operates, Herman Miller, DWR, Geiger, Maharam, POSH, Nemschoff, Colbrook Bosson Saunders ("CBS"), HAY, Maars
Livings Walls and Naughtone are acknowledged as leading brands that inspire architects and designers to create their best design
solutions. This portfolio has enabled Herman Miller to connect with new audiences, channels, geographies and product categories.
Leveraging the collective brand equity of the Herman Miller Group across the lines of business is an important element of the Company's
business strategy.
Problem-Solving Design and Innovation - The Company is committed to developing research-based functionality and aesthetically
innovative new products and has a history of doing so, in collaboration with a global network of leading independent designers. The
Company believes its skills and experience in matching problem-solving design with the workplace needs of customers provide the
Company with a competitive advantage in the marketplace. An important component of the Company's business strategy is to actively
pursue a program of new product research, design and development. The Company accomplishes this through the use of an internal
research and engineering staff that engages with third party design resources generally compensated on a royalty basis.
Operational Excellence - The Company was among the first in the industry to embrace the concepts of lean manufacturing. HMPS
provides the foundation for all the Company's manufacturing operations. The Company is committed to continuously improving both
product quality and production and operational efficiency. The Company has extended this lean process work to its non-manufacturing
processes as well as externally to its manufacturing supply chain and distribution channel. The Company believes these concepts
hold significant promise for further gains in reliability, quality and efficiency.
Omni-Channel Reach - The Company has built a multi-channel distribution capability that it considers unique. Through contract furniture
dealers, direct customer sales, retail studios, e-Commerce, catalogs and independent retailers, the Company serves contract and
residential customers across a range of channels and geographies.
Global Scale - In addition to its global omni-channel distribution capability, the Company has a global network of designers, suppliers,
manufacturing operations and research and development centers that position the Company to serve contract and residential customers
globally. The Company believes that leveraging this global scale will be an important enabler to executing its strategy.
Channels of Distribution
The Company's products and services are offered to most of its customers under standard trade credit terms between 30 and 45 days. For all
the items below, revenue is recognized when both title and risk of loss transfers to the customer. The Company's products and services are
sold through the following distribution channels:
•
•
•
•
Independent and Owned Contract Furniture Dealers - Most of the Company's product sales are made to a network of independently
owned and operated contract furniture dealerships doing business in many countries around the world. These dealers purchase the
Company's products and distribute them to end customers. Many of these dealers also offer furniture-related services, including
product installation.
Direct Contract Sales - The Company also sells products and services directly to end customers without an intermediary (e.g., sales
to the U.S. federal government). In most of these instances, the Company contracts separately with a dealership or third-party installation
company to provide sales-related services.
Retail Studios - At the end of fiscal 2019, the Retail business unit included 39 retail studios (including 36 operating under the DWR
brand, 2 under the HAY brand and a Herman Miller Flagship store in New York City). This business also operates three outlet studios.
The retail studios are located in metropolitan areas throughout North America.
E-Commerce - The Company sells products through its online stores, in which products are available for sale via the Company's
website, hermanmiller.com, global e-commerce platforms, as well as through the dwr.com and us.hay.com online stores. These sites
complement our existing methods of distribution and extend the Company's brand to new customers.
18 2019 Annual Report
•
Direct-Mail Catalogs - The Company’s Retail business unit utilizes a direct-mail catalog program through its DWR subsidiary. A regular
schedule of catalog mailings is maintained throughout the fiscal year and these serve as a key driver of sales across each of DWR’s
channels, including retail studios and e-commerce websites.
•
Independent Retailers - Certain products are sold to end customers through independent retail operations.
Challenges Ahead
Like all businesses, the Company is faced with a host of challenges and risks. The Company believes its core strengths and values, which
provide the foundation for its strategic direction, have well prepared the Company to respond to the inevitable challenges it will face in the future.
While the Company is confident in its direction, it acknowledges the risks specific to our business and industry. Refer to Item 1A for discussion
of certain of these risk factors and Item 7A for disclosures of market risk.
Areas of Strategic Focus
Despite a number of risks and challenges, the Company believes it is well positioned to successfully pursue its mission of inspiring designs to
help people do great things. As our business and industry continue to evolve, we are constantly focused on staying ahead of the curve. With
the composition of the office floor plate moving toward a broader variety of furnishings, a greater desire for customization from our customers,
new technologies, and trends towards urbanization and more seamless transactions in the retail world, we have centered our overall value
creation strategy on four key priorities.
Unlock the Power of One Herman Miller - Coming together as a family of complementary brands will help achieve our goals of more
actively moving into the consumer marketplace, growing globally and making it easier to do business with us. The Company strives
to become more agile, invest in responsive innovation, simplify our go-to-market strategy and continue to lead in product innovation
across all of our businesses globally.
Build a Customer-centric, Digitally-enabled Business Model - Building a customer centric and digitally enabled business model is at
the forefront of our goal to become easier to do business with us. The Company will leverage its deep understanding of customer
journeys to deliver inspired products and a frictionless customer experience. Along with strengthening the core technology backbone,
the Company will also drive step-change in data, analytics, marketing and brand capabilities.
Accelerate Profitable Growth - There are identified opportunities for growth ahead in each of the Company’s business segments. We
believe we are the only player in our industry with access to meaningful contract and residential growth opportunities on a global scale.
At the same time, with our ongoing focus on operational excellence and specific profit improvement initiatives, we are focused on
continuous improvement of our cost structure.
Reinforce Our Commitment to Our People, Planet, Communities - With a legacy of corporate social responsibility that is deeply
ingrained in our culture, the Company will reinforce its commitment to its people, planet and communities in a more integrated and
deliberate way than ever before. The Company will focus on building, developing and retaining world-class talent, shaping an inclusive
and diverse workforce and elevating its total societal impact commitment. By viewing the impact of our organization through its total
societal impact, we believe we can create value for our shareholders, customers and employees, as well as for the broader communities
and environment in which we operate.
The Company believes its strategy continues to respond well to current and future realities in its markets. The Company's strategic priorities
are aimed at creating a sustainable and diverse revenue model that puts the customer at the center of everything we do and leverages enabling
digital capabilities to fully realize that vision.
Herman Miller, Inc. and Subsidiaries 19
Business Overview
The following is a summary of the significant events and items impacting the Company's operations for the year ended June 1, 2019:
•
•
•
•
•
•
•
•
•
Andi Owen was elected as President and Chief Executive Officer of the Company effective on August 22, 2018, succeeding Brian
Walker who retired from the Company in August 2018. Ms. Owen joins Herman Miller after a 25-year career at Gap Inc., where she
most recently served as Global President of Banana Republic, leading 11,000 employees in over 600 stores across 27 countries.
Net sales were $2,567.2 million and orders were $2,614.9 million, representing an increase of 7.8% and 8.6%, respectively, when
compared to the prior year. The increase in net sales was driven primarily by strong performance within the North America, International
and Retail segments, as well as a reclassification related to the adoption of the new revenue recognition standard (ASC 606). On an
organic basis, net sales were $2,583.7 million(*) and orders were $2,628.6 million, representing an increase of 7.1%(*) and 7.7%,
respectively, when compared to the prior year.
Gross margin was 36.2% as compared to 36.7% in the prior year. The decrease in gross margin was driven primarily by the
reclassification impact of adopting the new revenue recognition standard (ASC 606) at the beginning of fiscal 2019. Higher commodity
costs and the impact of tariffs on Chinese imports also decreased gross margin, but were offset by lower material costs within the
North America segment and lower costs within the International segment.
Operating expenses increased by $32.3 million or 4.7% as compared to the prior year. Operating expenses included special charges,
totaling $13.1 million, related mainly to costs associated with the CEO transition, certain business structure realignment costs and
third party consulting costs attributable to the Company's profit enhancement initiatives. Operating expenses also included restructuring
costs of $10.2 million related to actions involving facilities consolidation, targeted workforce reductions and costs associated with an
early retirement program.
The effective tax rate was 20.3% for fiscal 2019 compared to 25.2% for the prior year. The decrease in the current year effective tax
rate was driven primarily by the full year impact of the Tax Cuts and Jobs Act (the "Act") as compared to a partial year impact in fiscal
2018.
Diluted earnings per share increased $0.58 to $2.70, a 27.4% increase as compared to the prior year. Excluding the impact of
restructuring expenses, other special charges, a gain associated with the fair value adjustment of an investment, an inventory step
up on the HAY equity method investment and the final adjustment related to the adoption U.S. tax reform, adjusted diluted earnings
per share were $2.97(*), a 29.1% increase as compared to the prior year.
The Company declared cash dividends of $0.79 per share compared to $0.72 per share in the prior year.
Strategic investments of approximately $72 million were made in HAY and Maars Living Walls.
Effective in the fourth quarter of fiscal 2019, the Company 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".
The following summary includes the Company's view on the economic environment in which it operates:
•
•
•
North America remains generally conducive to continued growth due to recent positive industry order trends as reported by the Business
and Institutional Furniture Manufacturers Association ("BIFMA"), GDP growth, service sector employment and architectural billings.
The Company is monitoring the resolution of various trade policy negotiations between the U.S. and key trading partners as well as
the ongoing negotiations concerning the U.K. referendum to exit the European Union.
The Company is also navigating the impact of global tariffs. In May 2019, the U.S. enacted a 25% tariff rate on certain goods imported
by the Company and its suppliers from China. The Company continues to believe that pricing, strategic sourcing actions, and profit
optimization initiatives will fully offset the current level of tariffs imposed on imports from China.
The remaining sections of Item 7 include additional analysis of the fiscal year ended June 1, 2019, including discussion of significant
variances compared to the prior year period. A detailed review of our fiscal 2018 performance compared to our fiscal 2017 performance is set
forth in Part II, Item 7 of our Form 10-K for the fiscal year ended June 2, 2018.
(*) Non-GAAP measurements; see accompanying reconciliations and explanations.
20 2019 Annual Report
Reconciliation of Non-GAAP Financial Measures
This report contains references to Organic net sales and Adjusted diluted earnings per share ("EPS"), both of which are non-GAAP financial
measures (referred to collectively as the "Adjusted financial measures"). Organic Growth represents the change in sales and orders, excluding
the impact of divestitures, currency translation effects, the impact of reclassification related to the new revenue recognition standard (ASC 606),
and changes in shipping terms. Adjusted Earnings per Share represents reported diluted earnings per share excluding the impact from the
adoption of U.S. Tax Reform, an investment fair value adjustment, amortization of an inventory step up on the HAY equity method investment,
restructuring expenses, and other special charges, including related taxes. Restructuring expenses include actions involving facilities
consolidation, targeted workforce reductions and costs associated with an early retirement program. Special charges include costs related to
the CEO transition, certain business structure realignment costs, and third party consulting costs related to the Company's profit enhancement
initiatives.
The Company presents the Adjusted financial measures because we consider them to be important supplemental measures of our performance
and believe them to be useful in analyzing ongoing results from operations. The adjusted financial measures are not measurements of our
financial performance under GAAP and should not be considered an alternative to Earnings per share - diluted, or the Company's reported Net
sales under GAAP. The Adjusted financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute
for analysis of the Company's results as reported under GAAP. The Company's presentation of the Adjusted financial measures should not be
construed as an indication that its future results will be unaffected by unusual or infrequent items. The Company compensates for these limitations
by providing prominence of the GAAP results and using the Adjusted financial measures only as a supplement.
The following table reconciles Net sales to Organic net sales by segment for the fiscal years ended:
June 1, 2019
June 2, 2018
North America
International
Retail
Total
North America
International
$
1,686.5
$
492.2
$
388.5
$ 2,567.2
$
1,589.8
$
434.5
$
Retail
Total
356.9 $ 2,381.2
6.1%
13.3%
8.9%
7.8%
Net Sales, as reported
% change from PY
Proforma Adjustments
Dealer Divestitures
Currency Translation Effects (1)
Impact of Reclassification Related to New
Revenue Recognition Standard
Impact of Change in DWR Shipping Terms
Organic net sales
% change from PY
$
1,690.3
$
504.6
$
4.8%
12.9%
—
3.8
—
—
—
12.4
—
—
—
0.3
—
—
388.8
10.5%
—
16.5
—
—
(0.8)
—
23.9
—
—
—
12.3
—
$ 2,583.7
$
1,612.9
$
446.8
$
7.1%
—
—
—
(0.8)
—
36.2
(5.0)
(5.0)
351.9 $ 2,411.6
(1) Currency translation effects represent the estimated net impact of translating current period sales and orders using the average exchange rates applicable to the comparable
prior year period
The following table reconciles EPS to Adjusted EPS for the years indicated:
Earnings per Share - Diluted
Less: Adjustments Related to Adoption of U.S. Tax Cuts and Jobs Act
Less: Investment fair value adjustment, after tax
Add: Special charges, after tax
Add: inventory step up on HAY equity method investment, after tax
Add: Restructuring expenses, after tax
Adjusted Earnings per Share - Diluted
June 1, 2019
June 2, 2018
2.70 $
2.12
(0.02)
(0.03)
0.18
0.01
0.13
2.97 $
(0.05)
—
0.16
—
0.07
2.30
$
$
Weighted Average Shares Outstanding (used for Calculating Adjusted Earnings per Share) – Diluted
59,381,791
60,311,305
Herman Miller, Inc. and Subsidiaries 21
Financial Results
The following is a comparison of our annual results of operations and year-over-year percentage changes for the periods indicated:
(Dollars in millions)
Net sales
Cost of sales
Gross margin
Operating expenses
Operating earnings
Net other expenses
Earnings before income taxes
Income tax expense
Equity income from nonconsolidated affiliates, net of tax
Net earnings
Net earnings attributable to noncontrolling interests
Net earnings attributable to Herman Miller, Inc.
Fiscal 2019
2,567.2
$
1,637.3
929.9
726.4
203.5
8.4
195.1
39.6
5.0
160.5
—
160.5
$
Fiscal 2018
2,381.2
$
1,508.2
873.0
694.1
178.9
10.8
168.1
42.4
3.0
128.7
0.6
128.1
$
% Change
7.8 %
8.6 %
6.5 %
4.7 %
13.8 %
(22.2)%
16.1 %
(6.6)%
66.7 %
24.7 %
(100.0)%
25.3 %
The following table presents, for the periods indicated, the components of the Company's Consolidated Statements of Comprehensive Income
as a percentage of net sales:
Fiscal 2019
Fiscal 2018
Net sales
Cost of sales
Gross margin
Selling, general and administrative expenses
Restructuring and impairment expenses
Design and research expenses
Total operating expenses
Operating earnings
Net other expenses
Earnings before income taxes
Income tax expense
Equity income from nonconsolidated affiliates, net of tax
Net earnings
Net earnings attributable to noncontrolling interests
Net earnings attributable to Herman Miller, Inc.
100.0%
63.8
36.2
24.9
0.4
3.0
28.3
7.9
0.3
7.6
1.5
0.2
6.3
—
6.3
100.0%
63.3
36.7
25.8
0.2
3.1
29.1
7.5
0.5
7.1
1.8
0.1
5.4
—
5.4
22 2019 Annual Report
Net Sales, Orders and Backlog - Fiscal 2019 Compared to Fiscal 2018
Consolidated net sales increased $186.0 million to $2,567.2 million from $2,381.2 million for the fiscal year ended June 1, 2019 compared to
the fiscal year ended June 2, 2018. The following items contributed to the change:
•
•
•
•
•
•
Increased sales volumes within the North America segment of approximately $74 million due to increased demand within the Company's
core contract furniture business.
Increased sales volumes within the International segment of approximately $57 million, which were driven by broad-based growth
across the Asia Pacific and Latin America regions.
Adoption of ASC 606 - Revenue from Contracts with Customers at the beginning of fiscal 2019 led to the reclassification of certain
pricing elements from Net sales to Cost of sales, which resulted in an increase in Net sales of $40.5 million compared to the prior year
in which revenue was recorded under previous accounting rules.
Increased sales volumes within the Retail segment of approximately $29 million, which were driven primarily by the introduction of
HAY products and growth across the Company's DWR studio, e-commerce and contract channels.
Incremental list price increases, net of deeper contract price discounting, of approximately $5 million.
Foreign currency translation had a negative impact on net sales of approximately $16 million.
Consolidated net trade orders for fiscal 2019 totaled $2,614.9 million compared to $2,408.2 million in fiscal 2018, an increase of 8.6 percent.
On an organic basis, which excludes the impact of the adoption of ASC 606, as well as foreign currency translation and dealer divestitures,
orders increased by 7.7 percent from last fiscal year. The impact of the adoption of ASC 606 increased orders by $35.7 million in the current
year and changes in foreign currency for the fiscal year increased orders by approximately $13.7 million as compared to the prior year. Dealer
divestitures had a $2.2 million unfavorable impact on current year orders.
The Company's backlog of unfilled orders at the end of fiscal 2019 totaled $394.2 million, a 12.4 percent increase from the fiscal 2018 ending
backlog of $350.7 million.
(1) Non-GAAP measurements; see accompanying reconciliations and explanations.
Gross Margin - Fiscal 2019 Compared to Fiscal 2018
Consolidated gross margin was 36.2% for fiscal 2019 as compared to 36.7% for fiscal 2018. The following factors summarize the major
drivers of the year-over-year change in gross margin percentage:
•
•
•
•
Approximately 60 basis points of the year-over-year decrease in gross margin related to the adoption of the new revenue recognition
standard (ASC 606) at the beginning of fiscal 2019. This adoption requires recording certain product pricing elements as expenses
within cost of goods sold that were previously classified on a net basis within sales. This reclassification lowers gross margin percentage
but has no impact on gross margin dollars.
Higher commodity costs and the impact of tariffs on Chinese imports drove an unfavorable impact of approximately 30 basis points
relative to last fiscal year.
Higher freight and storage costs within the Retail segment decreased gross margin by approximately 30 basis points as compared to
last fiscal year.
Lower material costs within the North America segment, due primarily to reduced outsourcing, and lower costs within the International
segment, due primarily to volume leverage and product mix, increased gross margin by approximately 50 basis points as compared
to last fiscal year.
Herman Miller, Inc. and Subsidiaries 23
Operating Expenses - Fiscal 2019 Compared to Fiscal 2018
Operating expenses increased by $32.3 million or 4.7% over the prior year. The following factors contributed to the change:
•
•
•
•
•
Compensation and benefit costs increased by approximately $9 million due mainly to employee headcount and wage increases.
Incremental spend of approximately $5 million related to the marketing, e-commerce and studios associated with the launch of the
HAY brand in North America.
Higher information technology related expenses of approximately $4 million.
Restructuring and special charges, primarily related to facilities consolidation and costs associated with an early retirement program
increased operating expenses by approximately $4 million.
Sales volume based costs, such as sales commissions and royalties, drove an increase in operating expenses of approximately $4
million.
• Marketing expenses increased by roughly $3 million due primarily to the sales initiatives within the North America and Retail segments.
Incremental costs related to the continued growth and expansion of DWR retail studios increased operating expenses by
•
approximately $2 million.
Depreciation expense increased by approximately $2 million and was driven primarily by investment in facilities and information
technology systems.
•
Operating Earnings
Operating earnings in fiscal 2019 were $203.5 million, or 7.9% of sales, an increase of $24.6 million compared to fiscal 2018 operating earnings
of $178.9 million, or 7.5% of sales.
Other Expenses and Income
Net other expenses for fiscal 2019 were $8.4 million, a decrease of $2.4 million compared to net other expenses in fiscal 2018 of $10.8 million.
The decrease in net other expenses in fiscal 2019 was primarily the result of a gain related to an investment fair value adjustment.
Equity Earnings from Nonconsolidated Affiliates
Equity earnings from nonconsolidated affiliates for fiscal 2019 were $5.0 million, an increase of $2.0 million compared to Equity earnings from
nonconsolidated affiliates of $3.0 million in fiscal 2018. This increase was driven by incremental earnings from the Company's investment in
Naughtone and HAY.
24 2019 Annual Report
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.
Securities and Exchange Commission Staff Accounting Bulletin No. 118 allowed the use of provisional amounts if accounting for certain income
tax effects of the Act had not been completed by the time the company’s financial statements are issued. A measurement period was provided
beginning December 22, 2017 and was not to last longer than one year. During the year ended June 1, 2019, the Company completed its
accounting for all the effects of the Act and recorded adjustments to the provisional amounts primarily for the one-time U.S. tax liability on certain
undistributed foreign earnings and also an adjustment related to foreign tax credits to increase the income tax benefit from the Act by $1.0
million.
The Company's effective tax rate was 20.3 percent in fiscal 2019, and 25.2 percent in fiscal 2018. The effective tax rate in fiscal 2019 was below
the United States statutory rate of 21 percent, primarily due to an increase in the mix of earnings in tax jurisdictions that have rates lower than
the United States statutory rate and the research and development tax credit under the Protecting Americans from Tax Hikes ("PATH") Act of
2015.
The effective tax rate in fiscal 2018 was below the statutory rate of 29.1 percent, primarily due to an increase in the mix of earnings in tax
jurisdictions that have rates lower than the United States statutory rate, the manufacturing deduction under the American Jobs Creation Act of
2004 (“AJCA”) and the research and development tax credit under the PATH.
For further information regarding income taxes, refer to Note 11 of the Consolidated Financial Statements.
Net Earnings; Earnings per Share
In fiscal 2019 and fiscal 2018, the Company generated net earnings attributable to Herman Miller, Inc. of $160.5 million and $128.1 million,
respectively. Diluted earnings per share were $2.70 and $2.12 for fiscal 2019 and fiscal 2018, respectively.
Herman Miller, Inc. and Subsidiaries 25
Reportable Operating Segments Results
The business is comprised of various operating segments as defined by generally accepted accounting principles in the United States. These
operating segments are determined on the basis of how the Company internally reports and evaluates financial information used to make
operating decisions.
Prior to the fourth quarter of fiscal 2019, the Company's reportable segments consisted of North American Furniture Solutions, ELA ("EMEA,
Latin America, and Asia Pacific") Furniture Solutions, Specialty and Consumer. Effective in the fourth quarter of fiscal 2019, the Company has
revised its reportable segments to combine the Specialty reportable segment with the North American Furniture Solutions reportable segment.
The newly combined segment is called "North America Contract". There were no changes to the Company's ELA Furniture Solutions ("ELA")
and Consumer segments, but each has been renamed. Effective in the fourth quarter of fiscal 2019, ELA is now named "International Contract"
and Consumer is named "Retail". The Specialty segment (Maharam, Geiger, Nemschoff and the Herman Miller Collection) has been combined
with the North America Contract segment under a common segment manager as of the fourth quarter fiscal 2019. The change in operating
segments reflect the basis of how the Company internally reports and evaluates financial information used to make operating decisions. Prior
year results disclosed in the table below have been revised to reflect these changes. Accordingly, fiscal 2018 net sales and operating earnings
for the Specialty segment of $305.4 million and $8.9 million, respectively, have been included within the results of the North America Contract
reportable segment.
The Company's operating segments can be further described as follows:
•
•
•
•
North America Contract — 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 and Herman Miller Collection
products.
International Contract — Includes the operations associated with the design, manufacture and sale of furniture products, primarily for
work-related settings, in the Europe, Middle East and Africa (EMEA), Latin America and Asia-Pacific geographic regions.
Retail — Includes the operations associated with the sale of modern design furnishings and accessories to third party retail distributors,
as well as direct to consumer sales through e-commerce, direct mailing catalogs and DWR and HAY studios.
Corporate — Consists 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.
The charts below present the relative mix of Net sales and Operating earnings across each of the Company's reportable segments. This is
followed by a discussion of the Company's results, by reportable segment.
26 2019 Annual Report
North America Contract ("North America")
Net sales
Gross margin
Gross margin %
Operating earnings
Operating earnings %
$
Fiscal 2019
1,686.5
592.3
35.1%
189.7
11.2%
$
Fiscal 2018
1,589.8
565.5
35.6%
175.2
11.0%
$
Change
96.7
26.8
(0.5)%
14.5
0.2 %
Net sales increased 6.1%, or 4.8%(*) on an organic basis, over the prior year due to:
•
•
•
Increased sales volumes within the North America segment of approximately $74 million due to increased demand within the Company's
core contract furniture business; and
The adoption of ASC 606 - Revenue from Contracts with Customers at the beginning of fiscal 2019 which led to the reclassification
of $27.0 million of certain pricing elements from net sales to cost of sales; partially offset by
The impact of foreign currency translation, which decreased sales by roughly $4 million.
Operating earnings increased $14.5 million, or 8.3%, over the prior year due to:
•
•
Increased gross margin of $26.8 million due to increased sales volumes and decreased gross margin percentage of 50 basis points
due mainly to the adoption of ASC 606 and higher commodity and tariff costs, partially offset by profit optimization initiatives and
improved material performance; partially offset by
Increased operating expenses of $12.3 million driven primarily by greater restructuring expenses in the current year related to facilities
consolidation and costs associated with an early retirement program. Increases in compensation and benefit costs also contributed
to the increase in operating expenses from the comparative period.
(*) Non-GAAP measurements; see accompanying reconciliations and explanations.
Herman Miller, Inc. and Subsidiaries 27
International Contract ("International")
Net sales
Gross margin
Gross margin %
Operating earnings
Operating earnings %
$
Fiscal 2019
492.2
166.9
33.9%
57.8
11.7%
$
Fiscal 2018
434.5
144.2
33.2%
36.9
8.5%
$
Change
57.7
22.7
0.7%
20.9
3.2%
Net sales increased 13.3%, or 12.9%(*) on an organic basis, over the prior year due to:
•
•
•
Increased sales volumes within the International segment of approximately $57 million which were driven by broad-based growth
across the Asia Pacific and Latin America regions; and
The adoption of ASC 606 - Revenue from Contracts with Customers at the beginning of fiscal 2019 which led to the reclassification
of $13.5 million of certain pricing elements from net sales to cost of sales; partially offset by
The impact of foreign currency translation which decreased sales by roughly $12 million.
Operating earnings increased $20.9 million, or 56.6%, over the prior year due to:
•
•
•
Increased gross margin of $22.7 million due mainly to increased sales volumes; and
Increased gross margin of 70 basis points due mainly to lower overhead costs associated with the benefit from recent restructuring
activities in China and lower material costs, driven primarily by volume leverage and product mix; partially offset by
Decreases to gross margin due to deeper discounting and the adoption of ASC 606.
Retail
Net sales
Gross margin
Gross margin %
Operating earnings
Operating earnings %
$
Fiscal 2019
388.5
170.7
43.9%
5.3
1.4%
$
Fiscal 2018
356.9
163.3
45.8%
13.9
3.9%
$
Change
31.6
7.4
(1.9)%
(8.6)
(2.5)%
Net sales increased 8.9%, or 10.5%(*) on an organic basis, over the prior year due to:
•
•
Increased sales volumes within the Retail segment of approximately $29 million which were driven primarily by the introduction of
HAY products and growth across the Company's DWR studio, e-commerce, and contract channels; and
Incremental list price increases, net of deeper discounting, which increased net sales by approximately $4 million.
Operating earnings decreased $8.6 million, or 61.9%, over the prior year due to:
•
•
Increased operating expenses of $16.0 million due to incremental marketing, compensation and depreciation expenses that were
driven mainly by growth in the segment, new studios and the launch of the HAY brand in North America; offset by
Increased gross margin of $7.4 million on higher sales volumes but decreased gross margin percentage of 190 basis points due mainly
to lower shipping revenue, higher freight and storage costs and a shift in product mix, partially offset by profit optimization initiatives.
Corporate
Corporate unallocated expenses totaled $49.3 million for fiscal 2019, an increase of $2.2 million from fiscal 2018. The increase was driven
mainly by increased legal and information technology expenses.
(*) Non-GAAP measurements; see accompanying reconciliations and explanations.
28 2019 Annual Report
Liquidity and Capital Resources
The table below presents certain key cash flow and capital highlights for the fiscal years indicated.
(In millions)
Cash and cash equivalents, end of period
Marketable securities, end of period
Cash provided by operating activities
Cash used in investing activities
Cash (used in) provided by financing Activities
Pension contributions
Capital expenditures
Common stock repurchased
Long-term debt, end of period
Available unsecured credit facilities, end of period (1)
(1) Amounts shown are net of outstanding letters of credit, which are applied against the Company's unsecured credit facility.
$
$
$
$
$
$
$
$
$
$
Fiscal Year Ended
2018
2019
$
159.2
$
8.8
216.4
$
(165.0) $
(91.9) $
(0.9) $
(85.8) $
(47.9) $
$
281.9
$
165.0
203.9
8.6
166.5
(62.7)
2.5
(13.4)
(70.6)
(46.5)
275.0
166.8
Cash Flow — Operating Activities
Cash generated from operating activities in fiscal 2019 totaled $216.4 million compared to $166.5 million generated in the prior year.
Changes in working capital balances in fiscal 2019 resulted in a $34.1 million use of cash compared to a $32.8 million use of cash in the prior
fiscal year. The cash outflow related to changes in working capital balances was driven primarily by an increase in inventory of $31.9 million
and an increase in accounts receivable of $24.8 million. The increase in inventory as of the end of fiscal 2019 as compared to fiscal 2018 was
due mainly to growth in demand at DWR, the build out of inventory in the International segment to fulfill demand, and the launch of the HAY
brand in North America. The increase in accounts receivable was driven by the timing of customer payments and shipments in the fourth quarter
of the fiscal year. These cash outflows were partially offset by an increase in accounts payable of $0.5 million and an increase in accrued liabilities
of $22.7 million. This increase in accrued liabilities is primarily related to an increase in accrued compensation related to the early retirement
program instituted in fiscal 2019 and an increase in other accruals.
In addition to changes in working capital, changes in pension contributions also impacted cash generated from operating activities. The Company
decreased pension contributions by $12.5 million in fiscal 2019 as compared to fiscal 2018.
The Company believes its recorded accounts receivable allowances at the end of the year are adequate to cover the risk of potential bad debts.
Allowances for non-collectible accounts receivable, as a percent of gross accounts receivable, totaled 1.4 percent and 1.3 percent, at the end
of fiscal years 2019 and 2018 respectively.
Cash Flow — Investing Activities
Capital expenditures totaled $85.8 million and $70.6 million in fiscal 2019 and 2018 respectively. The increase in capital expenditures of $15.2
million from fiscal 2018 to fiscal 2019 was driven primarily by an increase in expenditures related to manufacturing assets in West Michigan and
Design Within Reach studio build outs.
Cash proceeds from sales of dealers and properties were $0.5 million and $2.1 million in fiscal 2019 and 2018 respectively. Cash proceeds
received in fiscal 2019 were primarily due to the disposal of property plant and equipment in the International Contract segment. Cash proceeds
received in fiscal 2018 was primarily attributable to the sale of a wholly-owned contract furniture dealership in Vancouver, Canada for initial cash
consideration of $2.0 million.
Included in the fiscal 2019 and 2018 investing activities are net cash outflows related to equity investments in non-consolidated entities. The
following amounts represent the primary investments that drove the cash outflows:
(In millions)
Maars Holding, B.V
HAY A/S*
Naughtone Holdings Limited
Total Cash Outflow
* Formerly known as Nine United Denmark A/S
2019
2018
$
$
$
$
6.1
65.5
2.0
73.6
$
$
$
$
—
—
—
—
Herman Miller, Inc. and Subsidiaries 29
Outstanding commitments for future capital purchases at the end of fiscal 2019 were approximately $34.7 million. The Company expects capital
spending in fiscal 2020 to be between $105 million and $115 million. The capital spending will be allocated primarily to planned investments in
manufacturing assets and retail studio openings.
The Company's net marketable securities transactions for fiscal 2019 yielded a $0.2 million cash outflow. This compares to a zero use of cash
in fiscal 2018.
Cash Flow — Financing Activities
Cash used for financing activities was $91.9 million in fiscal 2019 as compared to cash provided by financing activities of $2.5 million in fiscal
2018. During fiscal 2018, the Company borrowed $225.0 million on its revolving line of credit and of these proceeds, $150.0 million was used
to repay its Series B Notes. There were no such borrowings in fiscal 2019.
Cash paid for repurchases of common stock was $47.9 million in the current year as compared to $46.5 million in the prior year. Additionally, in
fiscal 2019 there was a decrease in cash inflows from the issuance of shares related to stock-based compensation plans. The Company received
$12.3 million related to stock-based compensation plans in fiscal 2019 compared to $17.0 million in fiscal 2018.
Cash outflows for dividend payments were $45.6 million and $42.4 million in fiscal 2019 and 2018 respectively.
The Company is the controlling owner of a subsidiary in which there are redeemable noncontrolling equity interests outstanding. Certain minority
shareholders in this subsidiary have the right, at certain times, to require the subsidiary to acquire a portion of their ownership interest in those
entities at fair value. During fiscal 2019, these minority shareholders exercised certain of these options to require the Company's subsidiary to
purchase $10.1 million of the outstanding redeemable noncontrolling interests. By comparison, options exercised by the minority shareholders
in fiscal 2018 resulted in purchases totaling $1.0 million. The subsidiary also has an option to acquire a portion of the redeemable noncontrolling
interests at fair market value. On July 23, 2019, the subsidiary exercised an option that allowed it to acquire approximately $12.6 million of the
remaining $20.6 million of the redeemable noncontrolling equity interests.
The Company is a party to options, that if exercised, would require the Company to purchase an additional 33% of the equity in HAY at fair
market value. These options may be exercised during a period commencing from the third quarter of fiscal 2020 and annually thereafter.
Sources of Liquidity
In addition to cash flows from operating activities, the Company has access to liquidity through credit facilities, cash and cash equivalents and
short-term investments. These sources have been summarized below. For additional information, see Note 6 to the consolidated financial
statements.
(In millions)
Cash and cash equivalents
Marketable securities
Availability under revolving lines of credit
June 1, 2019
159.2
$
8.8
$
165.0
$
June 2, 2018
203.9
$
8.6
$
166.8
$
At the end of fiscal 2019, the Company had cash and cash equivalents of $159.2 million, including foreign cash and cash equivalents of $87.9
million. In addition, the Company had foreign marketable securities of $8.8 million. The foreign subsidiary holding the Company's marketable
securities is taxed as a U.S. taxpayer at the Company's election. Consequently, for tax purposes, all U.S. tax impacts for this subsidiary have
been recorded. Historically, the Company’s intent was to permanently reinvest the remainder of the cash outside the United States. However,
the Tax Cuts and Jobs Act (the “Act”), enacted on December 22, 2017, assesses a one-time tax on deferred foreign income upon transition to
a participation exemption system of taxation. The Company is considering the impact of the Act and the one-time transition tax on its foreign
earnings which are invested in liquidable assets. As a result, the Company may repatriate certain amounts in the future and is assessing the
amount of cash that will remain permanently reinvested.
The Company believes cash on hand, cash generated from operations, and borrowing capacity will provide adequate liquidity to fund near term
and foreseeable future business operations, capital needs, future dividends and share repurchases, subject to financing availability in the
marketplace.
30 2019 Annual Report
Contingencies
The Company is involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the
outcome of such proceedings and litigation currently pending will not materially affect the Company's Consolidated Financial Statements.
Basis of Presentation
The Company's fiscal year ends on the Saturday closest to May 31. The fiscal years ended June 1, 2019 and June 2, 2018 contained 52 weeks,
while the fiscal year ended June 3, 2017 contained 53 weeks.
Contractual Obligations
Contractual obligations associated with our ongoing business and financing activities will result in cash payments in future periods. The following
table summarizes the amounts and estimated timing of these future cash payments. Further information regarding debt obligations can be found
in Note 6 of the Consolidated Financial Statements. Additional information related to operating leases can be found in Note 7 of the Consolidated
Financial Statements.
$
$
Total
2020
(In millions)
Long-term debt (1)
Estimated interest on debt obligations (1)
Operating leases
Purchase obligations (2)
Pension and other post employment benefit plans funding (3)
Stockholder dividends (4)
Other (5)
Total
(1) Contractual cash payments on long-term debt obligations are disclosed herein based on the maturity date of the underlying debt. Estimated
future interest payments on our outstanding interest-bearing debt obligations are based on interest rates as of June 1, 2019. Actual cash
outflows may differ significantly due to changes in interest rates.
Payments due by fiscal year
2021-2022
275.0
19.9
89.7
3.9
0.1
—
2.3
390.9 $
Thereafter
—
23.9
101.9
—
0.3
—
5.7
131.8
275.0
73.1
315.8
73.5
0.9
11.6
15.3
765.2 $
11.8
51.7
69.6
0.4
11.6
5.4
150.5 $
17.5
72.5
—
0.1
—
1.9
92.0 $
2023-2024
$
— $
— $
$
(2) Purchase obligations consist of non-cancelable purchase orders and commitments for goods, services, and capital assets.
(3) Pension plan funding commitments are known for a 12-month period for those plans that are funded; unfunded pension and post-retirement
plan funding amounts are equal to the estimated benefit payments. As of June 1, 2019, the total projected benefit obligation for our domestic
and international employee pension benefit plans was $110.1 million.
(4) Represents the dividend payable as of June 1, 2019. Future dividend payments are not considered contractual obligations until declared.
(5) Other contractual obligations primarily represent long-term commitments related to deferred and supplemental employee compensation
benefits, and other post-employment benefits.
Off-Balance Sheet Arrangements — Guarantees
We provide certain guarantees to third parties under various arrangements in the form of product warranties, loan guarantees, standby letters
of credit, lease guarantees, performance bonds and indemnification provisions. These arrangements are accounted for and disclosed in
accordance with Accounting Standards Codification (ASC) Topic 460, "Guarantees" as described in Note 13 of the Consolidated Financial
Statements.
Herman Miller, Inc. and Subsidiaries 31
Critical Accounting Policies and Estimates
Our goal is to report financial results clearly and understandably. We follow accounting principles generally accepted in the United States in
preparing our Consolidated Financial Statements, which require us to make certain estimates and apply judgments that affect our financial
position and results of operations. We continually review our accounting policies and financial information disclosures. These policies and
disclosures are reviewed at least annually with the Audit Committee of the Board of Directors. Following is a summary of our more significant
accounting policies that require the use of estimates and judgments in preparing the financial statements.
Revenue Recognition
Most of our products and services are sold through one of six channels: independent and owned contract furniture dealers, direct contract sales,
retail studios, e-commerce, direct-mail catalogs, and independent retailers. The Company recognizes revenue when performance obligations,
based on the terms of customer contracts, are satisfied. This happens when control of goods and services based on the contract have been
conveyed to the customer. Revenue for the sale of products is typically recognized at the point in time when control transfers, generally upon
transfer of title and risk of loss to the customer. Revenue for services, including the installation of products by the Company's owned dealers,
is recognized over time as the services are provided. The method of revenue recognition may vary, depending on the type of contract with the
customer.
The Company's contracts with customers include master agreements and certain other forms of contracts, which do not reach the level of a
performance obligation until a purchase order is received from a customer. At the point in time that a purchase order under a contract is received
by the Company, the collective group of documents represent an enforceable contract between the Company and the customer. While certain
customer contracts may have a duration of greater than a year, all purchase orders are less than a year in duration.
Variable consideration exists within certain contracts that the Company has with customers. When variable consideration is present in a contract
with a customer, the Company estimates the amount that should be included in the transaction price utilizing either the expected value method
or the most likely amount method, depending on the nature of the variable consideration. These estimates are primarily related to rebate programs
which involve estimating future sales amounts and rebate percentages to use in the determination of transaction price. Variable consideration
is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under
the contract will not occur. Adjustments to Net sales from changes in variable consideration related to performance obligations completed in
previous periods are not material to the Company's financial statements. Also, the Company has no contracts with significant financing
components.
Receivable Allowances
We base our allowances for receivables on known customer exposures, historical credit experience and the specific identification of other
potential problems, including the current economic climate. These methods are applied to all major receivables, including trade, lease, and
notes receivable. In addition, we follow a policy that consistently applies reserve rates based on the outstanding accounts receivable and historical
experience. Actual collections can differ from our historical experience and if economic or business conditions deteriorate significantly, adjustments
to these reserves may be required.
The accounts receivable allowance totaled $3.5 million and $2.9 million at June 1, 2019 and June 2, 2018, respectively. As a percentage of
gross accounts receivable, these allowances totaled 1.4 percent and 1.3 percent for fiscal 2019 and fiscal 2018, respectively. The year-over-
year increase in the allowance is primarily due to increased general and customer-specific reserves in the current year, relative to the prior year.
Goodwill and Indefinite-lived Intangibles
The carrying value of goodwill and indefinite-lived intangible assets as of June 1, 2019 and June 2, 2018, was $381.9 million and $382.2 million,
respectively. Goodwill and indefinite-lived intangible assets are tested for impairment annually, or more frequently, if changes in circumstances
or the occurrence of events suggest that impairment exists. The Company performs the annual goodwill and indefinite-lived intangible assets
impairment testing during the fourth quarter of the fiscal year.
The Company completed the required annual goodwill impairment test in the fourth quarter of fiscal 2019, as of March 31, 2019, performing a
quantitative and qualitative impairment test for all goodwill reporting units and other indefinite-lived intangible assets. For the reporting units that
the Company elected to test qualitatively, as is permitted under ASU 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for
Impairment, the Company concluded it to be more likely than not that their estimated fair values are greater than their respective carrying values.
In performing the quantitative impairment test, the Company determined that the fair value of the reporting units exceeded the carrying amount
and, as such, the reporting units were not impaired and the second step of the impairment test was not necessary.
32 2019 Annual Report
The Company performed a sensitivity analysis over key valuation assumptions. The carrying value of the Company's Retail reporting unit was
$249.9 million as of June 1, 2019. The calculated fair value of the reporting unit was $282.6 million, which represents an excess fair value of
$32.7 million or 13%. Due to the level that the reporting unit fair values exceeded the carrying amounts and the results of the sensitivity analysis,
the Company may need to record an impairment charge if the operating results of its Retail reporting unit were to decline in future periods.
The test for impairment requires the Company to make several estimates about fair value, most of which are based on projected future cash
flows and market valuation multiples. We estimated the fair value of the reporting units using a discounted cash flow analysis and reconciled
the sum of the fair values of the reporting units to total market capitalization of the Company, plus a control premium. The control premium
represents an estimate associated with obtaining control of the Company in an acquisition. The discounted cash flow analysis used the present
value of projected cash flows and a residual value.
The Company employs a market-based approach in selecting the discount rates used in our analysis. The discount rates selected represent
market rates of return equal to what the Company believes a reasonable investor would expect to achieve on investments of similar size to the
Company's reporting units. The Company believes the discount rates selected in the quantitative assessment are appropriate in that, in all
cases, they meet or exceed the estimated weighted average cost of capital for our business as a whole. The results of the impairment test are
sensitive to changes in the discount rates and changes in the discount rate may result in future impairment.
In fiscal 2019, the Company performed only quantitative assessments in testing indefinite-lived intangible assets for impairment. The quantitative
impairment test is based on the relief from royalty method to determine the fair value of the indefinite-lived intangible assets, which is both a
market-based approach and an income-based approach. The relief from royalty method focuses on the level of royalty payments that the user
of an intangible asset would have to pay a third party for the use of the asset if it were not owned by the user. This method involves estimating
theoretical future after tax royalty payments based on the Company's forecasted revenues attributable to the trade names. These payments
are then discounted to present value utilizing a discount rate that considers the after-corporate tax required rate of return applicable to the asset.
The projected revenues reflect the best estimate of management for the trade names; however, actual revenues could differ from our estimates.
The discount rates selected represent market rates of return equal to what the Company believes a reasonable investor would expect to achieve
on investments of similar size and type to the indefinite-lived intangible asset being tested. The Company believes the discount rates selected
are appropriate in that, in all cases, they exceed the estimated weighted average cost of capital for our business as a whole. The results of the
impairment test are sensitive to changes in the discount rates and changes in the discount rate may result in future impairment. The Company
performed a sensitivity analysis over key valuation assumptions.
The carrying value of the Company's DWR trade name indefinite-lived intangible asset was $55.1 million as of June 1, 2019. The calculated
fair value of the reporting unit was $63.2 million which represents an excess fair value of $8.1 million or 14.6%. If the residual cash flows related
to the Company's DWR trade name were to decline in future periods, the Company may need to record an impairment charge.
During fiscal 2017, the Company recognized pre-tax asset impairment expenses totaling $7.1 million associated with the Nemschoff trade name,
after which there is no remaining carrying value for this trade name. This impairment expense was incurred due to the fact that the forecasted
revenue and profitability of the business did not support the recorded fair value for the trade name. There was no impairment indicated on
indefinite-lived intangible assets in fiscal 2019 or fiscal 2018 as a result of our impairment testing.
Long-lived Assets
The Company evaluates other long-lived assets and acquired business units for indicators of impairment when events or circumstances indicate
that an impairment risk may be present. The judgments regarding the existence of impairment are based on market conditions, operational
performance, and estimated future cash flows. If the carrying value of a long-lived asset is considered impaired, an impairment charge is recorded
to adjust the asset to its estimated fair value.
Warranty Reserves
The Company stands behind Company products and the promises it makes to customers. From time to time, quality issues arise resulting in
the need to incur costs to correct problems with products or services. The Company has established warranty reserves for the various costs
associated with these obligations. General warranty reserves are based on historical claims experience and periodically adjusted for business
levels. Specific reserves are established once an issue is identified. The valuation of such reserves is based on the estimated costs to correct
the problem. Actual costs may vary and may result in an adjustment to these reserves.
Herman Miller, Inc. and Subsidiaries 33
Inventory Reserves
Inventories are valued at the lower of cost or net realizable value. The inventories at our West Michigan manufacturing operations are valued
using the last-in, first-out (LIFO) method, whereas inventories of certain other subsidiaries are valued using the first-in, first-out (FIFO) method.
The Company establishes reserves for excess and obsolete inventory, based on prevailing circumstances and judgment for consideration of
current events, such as economic conditions that may affect inventory. The reserve required to record inventory at lower of cost or market may
be adjusted in response to changing conditions.
Income Taxes
Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities, and their respective tax bases. Deferred tax assets and liabilities are measured
using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. In
evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and
negative evidence. The assumptions about future taxable income require significant judgment and are consistent with the plans and estimates
we are using to manage the underlying businesses.
See Note 11 of the Consolidated Financial Statements for information regarding the Company's uncertain tax positions.
The Company has net operating loss (NOL) carryforwards available in certain jurisdictions to reduce future taxable income. The Company also
has tax credits available in certain jurisdictions to reduce future tax due. Future tax benefits for NOL carryforwards and tax credits are recognized
to the extent that realization of these benefits is considered more likely than not. This determination is based on the expectation that related
operations will be sufficiently profitable or various tax planning strategies available to us.
Self-Insurance Reserves
With the assistance of independent actuaries, reserves are established for workers' compensation and general liability exposures. The reserves
are established based on expected future claims for incurred losses. The Company also establishes reserves for health, prescription drugs and
dental benefit exposures based on historical claims information along with certain assumptions about future trends. The methods and assumptions
used to determine the liabilities are applied consistently, although, actual claims experience can vary. The Company also maintains insurance
coverage for certain risk exposures through traditional, premium-based insurance policies. The Company's health benefit and auto liability
retention levels do not include an aggregate stop loss policy. The Company's retention levels designated within significant insurance arrangements
as of June 1, 2019, are as follows:
(In millions)
General liability
Auto liability
Workers' compensation
Health benefit
Retention Level (per occurrence)
1.00
$
1.00
$
0.75
$
0.50
$
Pension and other Post-Retirement Benefits
The determination of the obligation and expense for pension and other post-retirement benefits depends on certain actuarial assumptions.
Among the most significant of these assumptions are the discount rate and expected long-term rate of return on plan assets. We determine
these assumptions as follows.
•
•
Discount Rate — This assumption is established at the end of the fiscal year based on high-quality corporate bond yields. The Company
utilizes the services of an independent actuarial firm to assist in determining the rate. Future expected actuarially determined cash
flows for the Company's domestic pension, international pension and post-retirement medical plans are individually discounted at the
spot rates under the Mercer Yield Curve to arrive at the plan’s obligations as of the measurement date.
Expected Long-Term Rate of Return — The Company bases this assumption on our long-term assumed rates of return for equities
and fixed income securities, weighted by the allocation of the invested assets of the pension plan. The Company considers likely
returns and risk factors specific to the various classes of investments and advice from independent actuaries in establishing this rate.
Changes in the investment allocation of plan assets would impact this assumption. A shift to a higher relative percentage of fixed
income securities, for example, would result in a lower assumed rate.
While the above assumption represents the long-term market return expectation, actual asset returns can and do differ from year-to-year. Such
differences give rise to actuarial gains and losses. In years where actual market returns are lower than the assumed rate, an actuarial loss is
generated. Conversely, an actuarial gain results when actual market returns exceed the assumed rate in a given year.
34 2019 Annual Report
Changes in the discount rate and return on assets can have a significant effect on the expense and obligations related to our pension plans. The
Company cannot reasonably predict if adjustments impacting the expense or obligation from changes in these estimates will be significant. Both
the June 1, 2019 pension funded status and fiscal 2020 expense are affected by year end fiscal 2019 discount rate and expected return on
assets assumptions. Any change to these assumptions will be specific to the time periods noted and may not be additive, so the impact of
changing multiple factors simultaneously cannot be calculated by combining the individual sensitivities shown.
As of June 1, 2019, and June 2, 2018, the net actuarial loss associated with the employee pension and post-retirement benefit plans totaled
approximately $48 million and $40 million, respectively.
The effect of a 1 percent increase/(decrease) in discount rates and expected return on assets on the projected fiscal 2020 expense and the
pension obligation as at June 1, 2019 is shown below:
(In millions)
Assumption
Discount rate
Expected return on assets
2020 Expense
U.S.
International
$(1.4) / 1.6
$(1.0) / 1.0
—
—
June 1, 2019 Obligation
U.S.
$(0.3) / 0.3
International
$(19.6) / 25.8
—
—
For purposes of determining annual net pension expense, the Company uses a calculated method for determining the market-related value of
plan assets. Under this method, the Company recognizes the change in fair value of plan assets systematically over a five-year period. Accordingly,
a portion of the net actuarial loss is deferred. As of June 1, 2019, the deferred net actuarial loss (i.e., the portion of the total net actuarial loss
not subject to amortization) was $3.2 million.
Refer to Note 8 of the Consolidated Financial Statements for more information regarding costs and assumptions used for employee benefit
plans.
Stock-Based Compensation
The Company views stock-based compensation as a key component of total compensation for certain employees, non-employee directors and
officers. The stock-based compensation programs have included grants of stock options, restricted stock units, performance share units, and
employee stock purchases. The Company recognizes expense related to each of these share-based arrangements. The Black-Scholes option
pricing model is used in estimating the fair value of stock options issued in connection with compensation programs. This pricing model requires
the use of several input assumptions. Among the most significant of these assumptions are the expected volatility of the common stock price
and the expected timing of future stock option exercises.
•
•
Expected Volatility — This represents a measure, expressed as a percentage, of the expected fluctuation in the market price of the
Company's common stock. As a point of reference, a high volatility percentage would assume a wider expected range of market
returns for a particular security. All other assumptions held constant, this would yield a higher stock option valuation than a calculation
using a lower measure of volatility. In measuring the fair value of the majority of stock options issued during fiscal 2019, we utilized
an expected volatility of 27 percent.
Expected Term of Options — This assumption represents the expected length of time between the grant date of a stock option and
the date at which it is exercised (option life). The Company assumed an average expected term of 4.4 years in calculating the fair
values of the majority of stock options issued during fiscal 2019.
Refer to Note 10 of the Consolidated Financial Statements for further discussion on our stock-based compensation plans.
Contingencies
In the ordinary course of business, the Company encounters matters that raise the potential for contingent liabilities. In evaluating these matters
for accounting treatment and disclosure, the Company is required to apply judgment to determine the probability that a liability has been incurred.
The Company is also required to measure, if possible, the dollar value of such liabilities in determining whether or not recognition in our financial
statements is required. This process involves the use of estimates which may differ from actual outcomes. Refer to Note 13 of the Consolidated
Financial Statements for more information relating to contingencies.
New Accounting Standards
Refer to Note 1 of the Consolidated Financial Statements for information related to new accounting standards.
Herman Miller, Inc. and Subsidiaries 35
Forward Looking Statements
This information contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act, as amended, that are based on management’s beliefs, assumptions, current expectations, estimates, and
projections about the office furniture industry, the economy, and the Company itself. Words like “anticipates,” “believes,” “confident,” “estimates,”
“expects,” “forecasts,” likely,” “plans,” “projects,” “should,” variations of such words, and similar expressions identify such forward-looking
statements. These statements do not guarantee future performance and involve certain risks, uncertainties, and assumptions that are difficult
to predict with regard to timing, extent, likelihood, and degree of occurrence. These risks include, without limitation, the success of our growth
strategy, employment and general economic conditions, the pace of economic recovery in the U.S and in our International markets, the increase
in white-collar employment, the willingness of customers to undertake capital expenditures, the types of products purchased by customers,
competitive-pricing pressures, the availability and pricing of raw materials, our reliance on a limited number of suppliers, our ability to expand
globally given the risks associated with regulatory and legal compliance challenges and accompanying currency fluctuations, the ability to
increase prices to absorb the additional costs of raw materials, the financial strength of our dealers and the financial strength of our customers,
our ability to locate new retail studios, negotiate favorable lease terms for new and existing locations and the implementation of our studio
portfolio transformation, our ability to attract and retain key executives and other qualified employees, our ability to continue to make product
innovations, the success of newly-introduced products, our ability to serve all of our markets, possible acquisitions, divestitures or alliances, the
pace and level of government procurement, the outcome of pending litigation or governmental audits or investigations, political risk in the markets
we serve, and other risks identified in our filings with the Securities and Exchange Commission. Therefore, actual results and outcomes may
materially differ from what we express or forecast. Furthermore, Herman Miller, Inc., undertakes no obligation to update, amend or clarify forward-
looking statements.
36 2019 Annual Report
Item 7A Quantitative and Qualitative Disclosures About Market Risk
The Company manufactures, markets, and sells its products throughout the world and, as a result, is subject to changing economic conditions,
which could reduce the demand for its products.
Direct Material Costs
The Company is exposed to risks arising from price changes for certain direct materials and assembly components used in its operations. The
largest of such costs incurred by the Company are for steel, plastics, textiles, wood particleboard, and aluminum components. The impact from
changes in all commodity prices increased the Company's costs by approximately $16 million during fiscal 2019 compared to the prior year.
The impact from changes in commodity prices increased the Company's costs by approximately $10 million during fiscal 2018 as compared to
fiscal 2017. Note that these changes include the impact of Chinese tariffs on the Company's direct material costs.
The market prices for commodities will fluctuate over time and the Company acknowledges that such changes are likely to impact its costs for
key direct materials and assembly components. Consequently, it views the prospect of such changes as an outlook risk to the business.
Foreign Exchange Risk
The Company primarily manufactures its products in the United States, United Kingdom, China and India. It also sources completed products
and product components from outside the United States. The Company's completed products are sold in numerous countries around the world.
Sales in foreign countries as well as certain expenses related to those sales are transacted in currencies other than the Company's reporting
currency, the U.S. dollar. Accordingly, production costs and profit margins related to these sales are effected by the currency exchange relationship
between the countries where the sales take place and the countries where the products are sourced or manufactured. These currency exchange
relationships can also impact the Company's competitive positions within these markets.
In the normal course of business, the Company enters into contracts denominated in foreign currencies. The principal foreign currencies in
which the Company conducts its business are the British pound sterling, euro, Canadian dollar, Japanese yen, Mexican peso, Hong Kong dollar
and Chinese renminbi. As of June 1, 2019, the Company had outstanding, thirteen forward currency instruments designed to offset either net
asset or net liability exposure that is denominated in non-functional currencies. Four forward contracts were placed to offset a 21.5 million U.S.
dollar-denominated net asset exposure. Two forward contracts were placed to offset a 21 million euro-denominated net asset exposure. One
forward contract was placed to offset an 8 million South African rand-denominated net asset exposure. One forward contract was placed to
offset an $0.6 million Canadian dollar-denominated net asset exposure. Five forward contracts were placed to offset a 14.0 million U.S.dollar-
denominated net liability exposure. One forward contract was placed to offset a 1.5 million euro-denominated net liability exposure.
As of June 2, 2018, the Company had outstanding, thirteen forward currency instruments designed to offset either net asset or net liability
exposure that is denominated in non-functional currencies. Three forward contracts were placed to offset a 18.5 million U.S. dollar-denominated
net liability exposure. Two forward contracts were placed to offset a 13.7 million euro-denominated net asset exposure. One forward contract
was placed to offset an 10.5 million South African rand-denominated net asset exposure. Five forward contracts were placed to offset a 13.0
million U.S.dollar-denominated net liability exposure. One forward contract was placed to offset a 1.2 million euro-denominated net liability
exposure.
The cost of the foreign currency hedges and remeasuring all foreign currency transactions into the appropriate functional currency was a net
gain of $0.3 million in fiscal 2019 in contrast to net loss of $0.4 million in fiscal 2018 included in net earnings. These amounts are included in
“Other Expenses (Income)” in the Consolidated Statements of Comprehensive Income. Additionally, the cumulative effect of translating the
balance sheet and income statement accounts from the functional currency into the United States dollar decreased the accumulated
comprehensive loss component of total stockholders' equity by $14.2 million and $2.7 million as of the end of as of the end of fiscal 2019 and
2018, respectively.
Interest Rate Risk
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 agreement was 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 agreement is used to
measure interest to be paid or received and does not represent the amount of exposure to credit loss. The differential paid or received on the
interest rate swap agreement is recognized as an adjustment to interest expense.
These interest rate swap derivative instruments are held and used by the Company as a tool for managing interest rate risk. They are not used
for trading or speculative purposes. The counterparties to the swap instruments are large financial institutions that the Company believes are
of high-quality creditworthiness. While the Company may be exposed to potential losses due to the credit risk of non-performance by these
counterparties, such losses are not anticipated.
Herman Miller, Inc. and Subsidiaries 37
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 market value of the effective interest rate swap instruments was a net liability of $1.2 million at June 1, 2019 compared to a net asset
of $15.0 million at June 2, 2018. All cash flows related to the Company's interest rate swap instruments are denominated in U.S. dollars. For
further information, refer to Notes 6 and 12 of the Consolidated Financial Statements.
Expected cash outflows (notional amounts) over the next five years and thereafter related to debt instruments are as follows.
(In millions)
Long-Term Debt - Fixed rate:
Interest rate = 6.00%
Interest rate = 1.949%(2)
Interest rate = 2.387%(2)
2020
2021
2022
2023
2024
Thereafter
Total(1)
$ — $ 50.0 $ — $ — $ — $
$ — $ — $ 150.0 $ — $ — $
$ — $ — $ 75.0 $ — $ — $
— $
— $
— $
50.0
150.0
75.0
(1) Amount does not include the recorded fair value of the swap instruments, which totaled a $1.2 million net liability and a $15.0 million net
asset at the end of fiscal 2019 and 2018, respectively.
(2) The Company's revolving credit facility has a variable interest rate, but due to the interest rate swaps, the rate on $150.0 million and $75.0
million will be fixed at 1.949% and 2.387%, respectively as demonstrated in the table above.
38 2019 Annual Report
Item 8 Financial Statements and Supplementary Data
Herman Miller, Inc.
Consolidated Statements of Comprehensive Income
(In millions, except per share data)
June 1, 2019
June 2, 2018
June 3, 2017
Fiscal Years Ended
$
2,567.2 $
2,381.2 $
1,637.3
929.9
1,508.2
873.0
2,278.2
1,414.0
864.2
Net sales
Cost of sales
Gross margin
Operating expenses:
Selling, general and administrative
Restructuring and impairment expenses
Design and research
Total operating expenses
Operating earnings
Other expenses (income):
Interest expense
Interest and other investment income
Other, net
Net other expenses
Earnings before income taxes
Income tax expense
Equity earnings from nonconsolidated affiliates, net of tax
Net earnings
Net earnings attributable to noncontrolling interests
Net earnings attributable to Herman Miller, Inc.
Earnings per share — basic
Earnings per share — diluted
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments
Pension and post-retirement liability adjustments
Unrealized (losses) gains on interest rate swap agreement
Unrealized holding gain on available for sale securities
Total other comprehensive (loss) income
Comprehensive income
Comprehensive income attributable to noncontrolling interests
639.3
10.2
76.9
726.4
203.5
12.1
(2.1)
(1.6)
8.4
195.1
39.6
5.0
160.5
—
615.3
5.7
73.1
694.1
178.9
13.5
(4.4)
1.7
10.8
168.1
42.4
3.0
128.7
0.6
$
$
$
$
160.5
$
128.1
$
2.72 $
2.70 $
2.15 $
2.12 $
(14.2) $
2.7
$
(7.8)
(12.3)
—
(34.3)
126.2
—
10.4
7.8
—
20.9
149.6
0.6
587.5
12.5
73.1
673.1
191.1
15.2
(2.2)
0.5
13.5
177.6
55.1
1.6
124.1
0.2
123.9
2.07
2.05
(7.2)
(12.7)
2.1
0.1
(17.7)
106.4
0.2
106.2
Herman Miller, Inc. and Subsidiaries 39
Comprehensive income attributable to Herman Miller, Inc.
$
126.2
$
149.0
$
Herman Miller, Inc.
Consolidated Balance Sheets
(In millions, except share and per share data)
Assets
Current Assets:
Cash and cash equivalents
Marketable securities
Accounts and notes receivable, less allowances of $3.8 in 2019 and $3.3 in 2018
Unbilled accounts receivable
Inventories, net
Prepaid taxes
Other
Total Current Assets
Property and Equipment:
Land and improvements
Buildings and improvements
Machinery and equipment
Construction in progress
Gross Property and Equipment
Less: Accumulated depreciation
Net Property and Equipment
Goodwill
Indefinite-lived intangibles
Other amortizable intangibles, net
Other assets
Total Assets
Liabilities, Redeemable Noncontrolling Interests and Stockholders' Equity
Current Liabilities:
Accounts payable
Accrued compensation and benefits
Accrued warranty
Customer deposits
Other accrued liabilities
Total Current Liabilities
Long-term debt, less current portion
Pension and post-retirement benefits
Other liabilities
Total Liabilities
Redeemable noncontrolling interests
Stockholders' Equity:
Preferred stock, no par value (10,000,000 shares authorized, none issued)
Common stock, $0.20 par value (240,000,000 shares authorized, 58,794,148 and
59,230,974 shares issued and outstanding in 2019 and 2018, respectively)
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Key executive deferred compensation
Herman Miller, Inc. Stockholders' Equity
Noncontrolling interests
Total Stockholders' Equity
Total Liabilities, Redeemable Noncontrolling Interests and Stockholders' Equity
40 2019 Annual Report
June 1, 2019
June 2, 2018
$
$
$
$
$
$
159.2
8.8
218.0
34.3
184.2
9.2
47.6
661.3
24.2
267.6
733.0
59.9
1,084.7
(736.1)
348.6
303.8
78.1
41.1
136.4
1,569.3
177.7
85.5
53.1
30.7
99.1
446.1
281.9
24.5
77.0
829.5
20.6
—
11.7
89.8
712.7
(94.2)
(0.8)
719.2
—
719.2
$
1,569.3
$
203.9
8.6
217.4
1.9
162.4
9.9
41.3
645.4
24.4
238.6
700.0
57.8
1,020.8
(689.4)
331.4
304.1
78.1
41.3
79.2
1,479.5
171.4
86.3
51.5
27.6
77.0
413.8
275.0
15.6
79.8
784.2
30.5
—
11.7
116.6
598.3
(61.3)
(0.7)
664.6
0.2
664.8
1,479.5
Herman Miller, Inc.
Consolidated Statements of Stockholders' Equity
Accumulated
Other
Comprehensive
Income (Loss)
Key Executive
Deferred
Compensation
Herman
Miller, Inc.
Stockholders'
Equity
Noncontrolling
Interests
Total
Stockholders'
Equity
$
$
(64.5)
—
(17.7)
$
(1.1)
—
—
$
524.4
123.9
(17.7)
(In millions, except share and
per share data)
Preferred
Stock
$
$
$
May 28, 2016
Net earnings
Other comprehensive loss
Stock-based compensation
expense
Excess tax benefit for stock-
based compensation
Exercise of stock options
Restricted and performance
stock units released
Employee stock purchase
plan issuances
Repurchase and retirement
of common stock
Directors' fees
Deferred compensation plan
Dividends declared ($0.68
per share)
Redemption value
adjustment
June 3, 2017
Net earnings
Other comprehensive income
Stock-based compensation
expense
Exercise of stock options
Restricted and performance
stock units released
Employee stock purchase
plan issuances
Repurchase and retirement
of common stock
Directors' fees
Deferred compensation plan
Dividends declared ($0.72
per share)
Redemption value
adjustment
Cumulative effect of
accounting changes
June 2, 2018
Net earnings
Other comprehensive loss
Stock-based compensation
expense
Exercise of stock options
Restricted and performance
stock units released
Employee stock purchase
plan issuances
Repurchase and retirement
of common stock
Directors' fees
Deferred compensation plan
Dividends declared ($0.79
per share)
Cumulative effect of
accounting changes
June 1, 2019
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Common Stock
Shares
59,868,276
—
—
Amount
$ 12.0
—
—
Additional
Paid-in
Capital
$ 142.7
—
—
Retained
Earnings
$ 435.3
123.9
—
—
—
327,299
207,776
68,047
—
—
—
—
—
(765,556)
(0.1)
9,982
—
—
—
—
—
—
—
9.1
(0.6)
9.4
0.3
1.9
(23.7)
0.3
(0.1)
—
—
—
—
—
—
—
—
—
—
(40.9)
1.2
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
0.1
—
—
59,715,824
—
—
$ 11.9
—
—
$ 139.3
—
—
$ 519.5
128.1
—
$
$
(82.2)
—
20.9
$
(1.0)
—
—
—
538,259
256,884
67,335
—
—
0.1
—
(1,356,156)
(0.3)
8,828
—
—
—
—
—
—
—
—
—
7.0
14.6
0.2
2.0
(46.2)
0.4
(0.4)
—
—
(0.3)
—
—
—
—
—
—
—
(43.2)
(6.2)
0.1
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
0.3
—
—
—
59,230,974
—
—
$ 11.7
—
—
$ 116.6
—
—
$ 598.3
160.5
—
$
$
(61.3)
—
(34.3)
$
(0.7)
—
—
—
347,248
468,807
62,957
—
0.1
0.1
—
8.4
10.0
0.2
1.9
(1,326,023)
(0.2)
(47.6)
10,185
—
—
—
—
—
—
—
0.3
—
—
—
—
—
—
—
—
—
—
(46.6)
0.5
—
—
—
—
—
—
—
—
1.4
—
—
—
—
—
—
(0.1)
—
—
9.1
(0.6)
9.4
0.3
1.9
(23.8)
0.3
—
(40.9)
1.2
587.5
128.1
20.9
7.0
14.6
0.3
2.0
(46.5)
0.4
(0.1)
(43.2)
(6.2)
(0.2)
664.6
160.5
(34.3)
8.4
10.1
0.3
1.9
(47.8)
0.3
(0.1)
(46.6)
1.9
$
$
$
0.3
—
—
(0.1)
$
—
—
—
—
—
—
—
—
—
0.2
—
—
—
—
—
—
—
—
—
—
—
—
$
0.2
—
—
(0.2)
—
—
—
—
—
—
—
—
524.7
123.9
(17.7)
9.0
(0.6)
9.4
0.3
1.9
(23.8)
0.3
—
(40.9)
1.2
587.7
128.1
20.9
7.0
14.6
0.3
2.0
(46.5)
0.4
(0.1)
(43.2)
(6.2)
(0.2)
664.8
160.5
(34.3)
8.2
10.1
0.3
1.9
(47.8)
0.3
(0.1)
(46.6)
1.9
719.2
58,794,148
$ 11.7
$
89.8
$ 712.7
$
(94.2)
$
(0.8)
$
719.2
$
— $
Herman Miller, Inc. and Subsidiaries 41
Herman Miller, Inc.
Consolidated Statements of Cash Flows
(In millions)
Cash Flows from Operating Activities:
Net earnings
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation expense
Amortization expense
Earnings from nonconsolidated affiliates net of dividends received
Investment fair value adjustment
Loss (gain) on sales of property and dealers
Deferred taxes
Pension contributions
Pension and post-retirement expenses
Restructuring and impairment expenses
Stock-based compensation
Increase in long-term liabilities
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable & unbilled accounts receivable
Increase in inventories
Increase in prepaid expenses and other
Increase (decrease) in accounts payable
(Decrease) increase in accrued liabilities
Other
Net Cash Provided by Operating Activities
Cash Flows from Investing Activities:
Net receipts (advances) from notes receivable
Marketable securities purchases
Marketable securities sales
Capital expenditures
Proceeds from sales of property and dealers
Payments of loans on cash surrender value of life insurance
Proceeds from life insurance policy
Purchase of HAY licensing agreement
Equity investment in non-controlled entities
Other, net
Net Cash Used in Investing Activities
Cash Flows from Financing Activities:
Repayments of long-term debt
Proceeds from credit facility
Repayments of credit facility
Dividends paid
Common stock issued
Common stock repurchased and retired
Purchase of noncontrolling interests
Other, net
Net Cash (Used in) Provided by Financing Activities
Effect of exchange rate changes on cash and cash equivalents
Net Increase In Cash and Cash Equivalents
Cash and cash equivalents, Beginning of Year
Cash and Cash Equivalents, End of Year
Other Cash Flow Information
Interest paid
Income taxes paid, net of cash received
42 2019 Annual Report
June 1, 2019
Fiscal Years Ended
June 2, 2018
June 3, 2017
$
160.5
$
128.7
$
124.1
65.9
6.2
(2.1)
(2.1)
0.8
0.8
(0.9)
1.2
10.2
7.3
1.6
(24.8)
(31.9)
(0.6)
0.5
22.7
1.1
216.4
1.1
(1.9)
1.7
(85.8)
0.5
—
—
(4.8)
(73.6)
(2.2)
(165.0)
—
—
—
(45.6)
12.3
(47.9)
(10.1)
(0.6)
(91.9)
(4.2)
(44.7)
203.9
159.2
11.5
41.0
$
$
$
60.9
6.0
(0.2)
—
(0.5)
(0.8)
(13.4)
2.9
5.7
7.7
3.4
(33.1)
(12.4)
(3.0)
16.0
(0.3)
(1.1)
166.5
(1.1)
(1.0)
1.0
(70.6)
2.1
—
8.1
—
—
(1.2)
(62.7)
(150.0)
340.4
(115.4)
(42.4)
17.0
(46.5)
(1.0)
0.4
2.5
1.4
107.7
96.2
203.9
16.4
34.2
$
$
$
52.9
6.0
(1.5)
—
—
14.8
(1.1)
0.5
12.5
8.7
6.2
17.3
(29.9)
(0.5)
(11.2)
0.8
2.5
202.1
2.4
(2.0)
0.9
(87.3)
—
(15.3)
—
—
(13.1)
(1.9)
(116.3)
—
794.4
(816.4)
(39.4)
11.7
(23.7)
(1.5)
0.3
(74.6)
0.1
11.3
84.9
96.2
13.4
35.6
$
$
$
Notes to the Consolidated Financial Statements
Table of Contents
Note 1 - Significant Accounting and Reporting Policies
Note 2 - Revenue from Contracts with Customers
Note 3 - Acquisitions and Divestitures
Note 4 - Inventories
Note 5 - Investments in Nonconsolidated Affiliates
Note 6 - Long-Term Debt
Note 7 - Operating Leases
Note 8 - Employee Benefit Plans
Note 9 - Common Stock and Per Share Information
Note 10 - Stock-Based Compensation
Note 11 - Income Taxes
Note 12 - Fair Value of Financial Instruments
Note 13 - Warranties, Guarantees, and Contingencies
Note 14 - Operating Segments
Note 15 - Accumulated Other Comprehensive Loss
Note 16 - Redeemable Noncontrolling Interests
Note 17 - Restructuring and Impairment Activities
Note 18 - Variable Interest Entities
Note 19 - Quarterly Financial Data (Unaudited)
Page No.
44
52
56
56
57
58
60
61
64
65
69
72
76
77
80
81
81
82
83
Herman Miller, Inc. and Subsidiaries 43
1. Significant Accounting and Reporting Policies
The following is a summary of significant accounting and reporting policies not reflected elsewhere in the accompanying financial statements.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of Herman Miller, Inc. and its controlled domestic and foreign subsidiaries. The
consolidated entities are collectively referred to as “the Company.” All intercompany accounts and transactions have been eliminated in the
Consolidated Financial Statements.
Description of Business
The Company researches, designs, manufactures, sells, and distributes interior furnishings, for use in various environments including office,
healthcare, educational and residential settings and provides related services that support companies all over the world. The Company's products
are sold primarily through independent contract office furniture dealers as well as the following channels: owned contract office furniture dealers,
direct customer sales, independent retailers, owned retail studios, direct-mail catalogs and the Company's e-commerce platforms.
Fiscal Year
The Company's fiscal year ends on the Saturday closest to May 31. The fiscal years ended June 1, 2019 and June 2, 2018 contained 52 weeks,
while the fiscal year ended June 3, 2017 contained 53 weeks.
Foreign Currency Translation
The functional currency for most of the foreign subsidiaries is their local currency. The cumulative effects of translating the balance sheet accounts
from the functional currency into the United States dollar using fiscal year-end exchange rates and translating revenue and expense accounts
using average exchange rates for the period is reflected as a component of Accumulated other comprehensive loss in the Consolidated Balance
Sheets.
The financial statement impact of gains and losses resulting from remeasuring foreign currency transactions into the appropriate functional
currency resulted in a net gain of $0.3 million and $0.4 million for the fiscal years ended June 1, 2019 and June 2, 2018, respectively, and a net
loss of $0.7 million for the fiscal year ended June 3, 2017. These amounts are included in “Other, net” in the Consolidated Statements of
Comprehensive Income.
Cash Equivalents
The Company holds cash equivalents as part of its cash management function. Cash equivalents include money market funds and time deposit
investments with original maturities of less than three months. The carrying value of cash equivalents, which approximates fair value, totaled
$102.8 million and $148.8 million as of June 1, 2019 and June 2, 2018, respectively. All cash equivalents are high-credit quality financial
instruments, and the amount of credit exposure to any one financial institution or instrument is limited.
Marketable Securities
The Company maintains a portfolio of marketable securities primarily comprised of mutual funds. These mutual funds are comprised of both
equity and fixed income funds. These investments are held by the Company's wholly owned insurance captive and are considered “available-
for-sale” securities. Accordingly, they have been recorded at fair value based on quoted market prices. Net unrealized holding gains or losses
related to the equity mutual funds are recorded through net income while net unrealized holding gains or losses related to the fixed income
mutual funds are recorded through other comprehensive income.
All marketable security transactions are recognized on the trade date. Realized gains and losses on disposal of available-for-sale investments
are included in “Interest and other investment income” in the Consolidated Statements of Comprehensive Income. See Note 12 of the Consolidated
Financial Statements for additional disclosures of marketable securities.
Accounts Receivable Allowances
Reserves for uncollectible accounts receivable balances are based on known customer exposures, historical credit experience and the specific
identification of other potentially uncollectible accounts. Balances are written off against the reserve once the Company determines the probability
of collection to be remote. The Company generally does not require collateral or other security on trade accounts receivable.
44 2019 Annual Report
Concentrations of Credit Risk
The Company's trade receivables are primarily due from independent dealers who, in turn, carry receivables from their customers. The Company
monitors and manages the credit risk associated with individual dealers and direct customers where applicable. Dealers are responsible for
assessing and assuming credit risk of their customers and may require their customers to provide deposits, letters of credit or other credit
enhancement measures. Some sales contracts are structured such that the customer payment or obligation is direct to the Company. In those
cases, the Company may assume the credit risk. Whether from dealers or customers, the Company's trade credit exposures are not concentrated
with any particular entity.
Inventories
Inventories are valued at the lower of cost or market and include material, labor and overhead. Inventory cost is determined using the last-in,
first-out (LIFO) method at manufacturing facilities in Michigan, whereas inventories of the Company's other locations are valued using the first-
in, first-out (FIFO) method. The Company establishes reserves for excess and obsolete inventory based on prevailing circumstances and
judgment for consideration of current events, such as economic conditions, that may affect inventory. The reserve required to record inventory
at lower of cost or net realizable value may be adjusted in response to changing conditions. Further information on the Company's recorded
inventory balances can be found in Note 4 of the Consolidated Financial Statements.
Goodwill and Indefinite-lived Intangible Assets
Goodwill is tested for impairment at the reporting unit level annually, or more frequently, when events or changes in circumstances indicate that
the fair value of a reporting unit has more likely than not declined below its carrying value. A reporting unit is defined as an operating segment
or one level below an operating segment. When testing goodwill for impairment, the Company may first assess qualitative factors. If an initial
qualitative assessment identifies that it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value, additional
quantitative testing is performed. The Company may also elect to skip the qualitative testing and proceed directly to the quantitative testing. If
the quantitative testing indicates that goodwill is impaired, the carrying value of goodwill is written down to fair value.
To estimate the fair value of each reporting unit when performing the quantitative testing, the Company utilizes a weighting of the income method
and the market method. The income method is based on a discounted future cash flow approach that uses a number of estimates, including
revenue based on assumed growth rates, estimated costs and discount rates based on the reporting unit's weighted average cost of capital.
Growth rates for each reporting unit are determined based on internal estimates, historical data and external sources. The growth estimates
are also used in planning for the Company's long-term and short-term business planning and forecasting. We test the reasonableness of the
inputs and outcomes of our discounted cash flow analysis against comparable market data. The market method is based on financial multiples
of companies comparable to each reporting unit and applies a control premium. The carrying value of each reporting unit represents the
assignment of various assets and liabilities, excluding corporate assets and liabilities, such as cash, investments and debt.
The Company completed the required annual goodwill impairment test in the fourth quarter of fiscal 2019, as of March 31, 2019, performing a
quantitative and qualitative impairment test for all goodwill reporting units and other indefinite-lived intangible assets. For the reporting units that
the Company elected to test qualitatively, as is permitted under ASU 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for
Impairment, the Company concluded it to be more likely than not that their estimated fair values are greater than their respective carrying values.
In performing the quantitative impairment test, the Company determined that the fair value of the reporting units exceeded the carrying amount
and, as such, the reporting units were not impaired and the second step of the impairment test was not necessary.
The Company performed a sensitivity analysis over key valuation assumptions. The carrying value of the Company's Retail reporting unit was
$249.9 million as of June 1, 2019. The calculated fair value of the reporting unit was $282.6 million, which represents an excess fair value of
$32.7 million or 13%. Due to the level that the reporting unit fair values exceeded the carrying amounts and the results of the sensitivity analysis,
the Company may need to record an impairment charge if the operating results of its Retail reporting unit were to decline in future periods.
Intangible assets with indefinite useful lives are not subject to amortization and are evaluated annually for impairment, or more frequently, when
events or changes in circumstances indicate that the fair value of an intangible asset may not be recoverable. The Company utilizes the relief
from royalty methodology to test for impairment. The primary assumptions for the relief from royalty method include revenue forecasts, earnings
forecasts, royalty rates and discount rates. The Company measures and records an impairment loss for the excess of the carrying value of the
asset over its fair value. The Company's indefinite-lived intangible assets consist of certain trade names valued at approximately $78.1 million
as of the end of fiscal 2019 and fiscal 2018. These assets have indefinite useful lives.
In fiscal 2019, the Company performed only quantitative assessments in testing indefinite-lived intangible assets for impairment. The carrying
value of the Company's DWR trade name indefinite-lived intangible asset was $55.1 million as of June 1, 2019. The calculated fair value of the
DWR trade name was $63.2 million which represents an excess fair value of $8.1 million or 14.6%. If the residual cash flows related to the
Company's DWR trade name were to decline in future periods, the Company may need to record an impairment charge.
Herman Miller, Inc. and Subsidiaries 45
During fiscal 2017, the Company recognized asset impairment expense totaling $7.1 million associated with the Nemschoff trade name, which
was recorded within the North America Contract operating segment. As of the end of fiscal 2017, the carrying value of the Nemschoff trade
name was zero. These impairment expenses are recorded in the Restructuring and impairment expenses line item within the Consolidated
Statements of Comprehensive Income.
Goodwill and other indefinite-lived assets included in the Consolidated Balance Sheets consist of the following:
(In millions)
Balance, June 3, 2017
Foreign currency translation adjustments
Sale of owned dealer
Balance, June 2, 2018
Foreign currency translation adjustments
Balance, June 1, 2019
Property, Equipment and Depreciation
Goodwill
Indefinite-lived
Intangible Assets
Total Goodwill and Indefinite-
lived Intangible Assets
$
$
$
304.5
(0.1)
(0.3)
304.1
(0.3)
303.8
$
$
$
78.1
—
—
78.1
—
78.1
$
$
$
382.6
(0.1)
(0.3)
382.2
(0.3)
381.9
Property and equipment are stated at cost. The cost is depreciated over the estimated useful lives of the assets using the straight-line method.
Estimated useful lives range from 3 to 10 years for machinery and equipment and do not exceed 40 years for buildings. Leasehold improvements
are depreciated over the lesser of the lease term or the useful life of the asset. The Company capitalizes certain costs incurred in connection
with the development, testing and installation of software for internal use and cloud computing arrangements. Software for internal use is included
in property and equipment and is depreciated over an estimated useful life not exceeding 5 years. Depreciation and amortization expense is
included in the Consolidated Statements of Comprehensive Income in the Cost of sales, Selling, general and administrative and Design and
research line items.
As of the end of fiscal 2019, outstanding commitments for future capital purchases approximated $34.7 million.
Other Long-Lived Assets
The Company reviews other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount
of an asset or an asset group may not be recoverable. Each impairment test is based on a comparison of the carrying amount of the asset or
asset group to the future undiscounted net cash flows expected to be generated by the asset or asset group, or in some cases, by prices for
similar assets. If such assets are considered to be impaired, the impairment amount to be recognized is the amount by which the carrying value
of the assets exceeds their fair value.
Amortizable intangible assets within Other amortizable intangibles, net in the Consolidated Balance Sheets consist primarily of patents,
trademarks and customer relationships. The customer relationships intangible asset is comprised of relationships with customers, specifiers,
networks, dealers and distributors. Refer to the following table for the combined gross carrying value and accumulated amortization for these
amortizable intangibles.
June 1, 2019
(In millions)
Gross carrying value
Accumulated amortization
Net
Gross carrying value
Accumulated amortization
Net
Patent and Trademarks Customer Relationships
55.2
$
27.6
27.6
20.1
12.5
7.6
$
$
$
$
$
June 2, 2018
Patent and Trademarks Customer Relationships
55.3
$
23.5
31.8
22.4
14.7
7.7
$
$
$
Other
$
$
Other
Total
12.0
6.1
5.9
7.5
5.7
1.8
$
$
$
$
87.3
46.2
41.1
85.2
43.9
41.3
Total
The Company amortizes these assets over their remaining useful lives using the straight-line method over periods ranging from 5 years to 20
years, or on an accelerated basis, to reflect the expected realization of the economic benefits. It is estimated that the weighted-average remaining
useful life of patents and trademarks is approximately 6 years and the weighted-average remaining useful life of customer relationships is 7
years.
46 2019 Annual Report
Estimated amortization expense on existing amortizable intangible assets as of June 1, 2019, for each of the succeeding five fiscal years, is as
follows:
(In millions)
2020
2021
2022
2023
2024
Self-Insurance
$
$
$
$
$
6.4
6.3
6.1
5.4
5.1
The Company is partially self-insured for general liability, workers' compensation and certain employee health and dental benefits under insurance
arrangements that provide for third-party coverage of claims exceeding the Company's loss retention levels. The Company's health benefit and
auto liability retention levels do not include an aggregate stop loss policy. The Company's retention levels designated within significant insurance
arrangements as of June 1, 2019, are as follows:
(In millions)
General liability
Auto liability
Workers' compensation
Health benefit
Retention Level (per occurrence)
1.00
$
1.00
$
0.75
$
0.50
$
The Company accrues for its self-insurance arrangements, as well as reserves for health, prescription drugs, and dental benefit exposures
based on actuarially-determined estimates, which are recorded in “Other liabilities” in the Consolidated Balance Sheets. The value of the liability
as of June 1, 2019 and June 2, 2018 was $11.7 million and $11.2 million, respectively. The actuarial valuations are based on historical information
along with certain assumptions about future events. Changes in assumptions for such matters as legal actions, medical costs, payment lag
times and changes in actual experience could cause these estimates to change. The general, auto, and workers' compensation liabilities are
managed through the Company's wholly-owned insurance captive.
Redeemable Noncontrolling Interests
Certain minority shareholders in the Company's subsidiary Herman Miller Consumer Holdings, Inc. have the right, at specified times over a
period of time, to require the Company to acquire portions of their ownership interest in those entities at fair value. Their interests in these
subsidiaries are classified outside permanent equity in the Consolidated Balance Sheets and are carried at the current estimated redemption
amounts.
The redemption amounts are estimated based on the fair value of the subsidiary, which is determined based on a weighting of the discounted
cash flow and market methods. The discounted cash flow analysis uses the present value of projected cash flows and a residual value. A market-
based approach is used to determine the discount rate for the discounted cash flow method. Market multiples for comparable companies are
used for the market method of valuation. The fair value of the subsidiary is sensitive to changes in projected revenues and costs, the discount
rate and the forward multiples of the comparable companies.
Changes in the estimated redemption amounts of the noncontrolling interests, subject to put options, are reflected at each reporting period with
a corresponding adjustment to Retained earnings. Future reductions in the carrying amounts are subject to a “floor” amount that is equal to the
fair value of the redeemable noncontrolling interests at the time they were originally recorded. See Note 16 of the Consolidated Financial
Statements for additional information.
Herman Miller, Inc. and Subsidiaries 47
Research, Development and Other Related Costs
Research, development, pre-production and start-up costs are expensed as incurred. Research and development ("R&D") costs consist of
expenditures incurred during the course of planned research and investigation aimed at discovery of new knowledge useful in developing new
products or processes. R&D costs also include the significant enhancement of existing products or production processes and the implementation
of such through design, testing of product alternatives or construction of prototypes. R&D costs included in “Design and research” expense in
the accompanying Consolidated Statements of Comprehensive Income are $58.8 million, $57.1 million and $58.6 million, in fiscal 2019, 2018,
and 2017, respectively.
Royalty payments made to designers of the Company's products as the products are sold are a variable cost based on product sales. These
expenses totaled $18.1 million, $16.0 million and $14.5 million in fiscal years 2019, 2018 and 2017 respectively. They are included in Design
and research expense in the accompanying Consolidated Statements of Comprehensive Income.
Customer Payments and Incentives
We offer various sales incentive programs to our customers, such as rebates and discounts. Programs such as rebates and discounts are
adjustments to the selling price and are therefore characterized as a reduction to net sales.
Revenue Recognition
The Company adopted ASC 606 - Revenue from Contracts with Customers at the beginning of fiscal 2019 using the modified retrospective
approach. The Company completed its review of the impact of the new standard and identified certain key accounting policy changes that
resulted from adopting the new standard. All necessary changes required by the new standard, including those to the Corporation's accounting
policies, controls, and disclosures, have been identified and implemented as of the beginning of fiscal 2019. See Note 2 of the Consolidated
Financial Statements for further information regarding the Company's revenue recognition accounting policies.
Shipping and Handling Expenses
The Company records shipping and handling related expenses under the caption Cost of sales in the Consolidated Statements of Comprehensive
Income.
Cost of Sales
The Company includes material, labor and overhead in cost of sales. Included within these categories are items such as freight charges,
warehousing costs, internal transfer costs and other costs of its distribution network.
Selling, General, and Administrative
The Company includes costs not directly related to the manufacturing of its products in the Selling, general, and administrative line item within
the Consolidated Statements of Comprehensive Income. Included in these expenses are items such as compensation expense, rental expense,
warranty expense and travel and entertainment expense.
Income Taxes
Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured
using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse.
The Company's annual effective tax rate is based on income, statutory tax rates and tax planning strategies available in the various jurisdictions
the Company operates. Complex tax laws can be subject to different interpretations by the Company and the respective government authorities.
Significant judgment is required in evaluating tax positions and determining our tax expense. Tax positions are reviewed quarterly and tax assets
and liabilities are adjusted as new information becomes available.
In evaluating the Company's ability to recover deferred tax assets within the jurisdiction from which they arise, the Company considers all positive
and negative evidence. These assumptions require significant judgment about forecasts of future taxable income.
Stock-Based Compensation
The Company has several stock-based compensation plans, which are described in Note 10 of the Consolidated Financial Statements. Our
policy is to expense stock-based compensation using the fair-value based method of accounting for all awards granted.
48 2019 Annual Report
Earnings per Share
Basic earnings per share (EPS) excludes the dilutive effect of common shares that could potentially be issued, due to the exercise of stock
options or the vesting of restricted shares and is computed by dividing net earnings by the weighted-average number of common shares
outstanding for the period. Diluted EPS is computed by dividing net earnings by the sum of the weighted-average number of shares outstanding,
plus all dilutive shares that could potentially be issued. Refer to Note 9 of the Consolidated Financial Statements for further information regarding
the computation of EPS.
Comprehensive Income
Comprehensive income consists of Net earnings, Foreign currency translation adjustments, Unrealized holding gain on available-for-sale
securities, Unrealized gains on interest rate swap agreement and Pension and post-retirement liability adjustments. Refer to Note 15 of the
Consolidated Financial Statements for further information regarding comprehensive income.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Fair Value
The Company classifies and discloses its fair value measurements in one of the following three categories:
•
•
•
Level 1 — Financial instruments with unadjusted, quoted prices listed on active market exchanges.
Level 2 — Financial instruments lacking unadjusted, quoted prices from active market exchanges, including over-the-counter traded
financial instruments. Financial instrument values are determined using prices for recently traded financial instruments with similar
underlying terms and direct or indirect observational inputs, such as interest rates and yield curves at commonly quoted intervals.
Level 3 — Financial instruments not actively traded on a market exchange and there is little, if any, market activity. Values are determined
using significant unobservable inputs or valuation techniques.
See Note 12 of the Consolidated Financial Statements for the required fair value disclosures.
Derivatives and Hedging
The Company calculates the fair value of financial instruments using quoted market prices whenever available. The Company utilizes derivatives
to manage exposures to foreign currency exchange rates and interest rate risk. The fair values of all derivatives are recognized as assets or
liabilities at the balance sheet date. Changes in the fair value of these instruments are reported within Other expenses (income): Other, net in
the Consolidated Statements of Comprehensive Income, or Accumulated Other Comprehensive Loss within the Consolidated Balance Sheets,
depending on the use of the derivative and whether it qualifies for hedge accounting treatment.
Gains and losses on derivatives that are designated and qualify as cash flow hedging instruments are recorded in Accumulated Other
Comprehensive Loss, to the extent the hedges are effective, until the underlying transactions are recognized in the Consolidated Statements
of Comprehensive Income. Derivatives not designated as hedging instruments are marked-to-market at the end of each period with the results
included in Consolidated Statements of Comprehensive Income.
Herman Miller, Inc. and Subsidiaries 49
New Accounting Standards
Recently Adopted Accounting Standards
Standard
Description
Revenue from
Contracts with
Customers
Financial
Instruments -
Overall:
Recognition and
Measurement of
Financial Assets
and Financial
Liabilities
Customer’s
Accounting for
Implementation
Costs Incurred in
a Cloud
Computing
Arrangement
That Is a Service
Contract
Reclassification
of Certain Tax
Effects from
Accumulated
Other
Comprehensive
Income
Compensation -
Retirement
Benefits:
Improving the
Presentation of
Net Periodic
Pension Cost
and Net Periodic
Postretirement
Benefit Cost
The standard outlines a single comprehensive model for
entities to use in accounting for revenue arising from
contracts with customers and supersedes most current
revenue recognition guidance, including industry-specific
guidance. The core principle of the revenue model is that
an entity should recognize revenue to depict the transfer
of promised goods or services to customers in an amount
that reflects the consideration to which the entity expects
to be entitled in exchange for those goods or services.
The standard is designed to create greater comparability
for financial statement users across industries and
jurisdictions and also requires enhanced disclosures. The
standard allows for two adoption methods, a full
retrospective or modified retrospective approach.
The standard provides guidance for the measurement,
presentation and disclosure of financial assets and
liabilities. The standard requires entities to measure equity
investments that do not result in consolidation and are not
accounted for under the equity method at fair value and
recognize any change in fair value in net income. The
standard does not permit early adoption and at adoption
a cumulative-effect adjustment to beginning retained
earnings should be recorded.
Date of
Adoption
Effect on the Financial Statements or
Other Significant Matters
June 3, 2018
The Company adopted
the standard
effective June 3, 2018 using the modified
retrospective method. Refer to Note 2 to the
financial statements for further information
regarding the adoption of the standard.
June 3, 2018
The Company adopted
the standard
effective June 3, 2018 using the modified
retrospective method. As a result,
the
Company reclassified $0.1 million of net
gains on mutual fund equity securities, that
were formerly classified as available for sale
securities before the adoption of the new
standard,
other
comprehensive loss to Retained earnings.
The impact of adoption also resulted in
certain disclosure changes. Refer to Note 12
further
the
of
information.
financial statements
from Accumulated
for
This update aligns the requirements for capitalizing
implementation costs incurred in a hosting arrangement
that is a service contract with the requirements for
capitalizing implementation costs incurred to develop or
obtain internal-use software. Early adoption is permitted.
September 2,
2018
The Company early adopted the standard
prospectively effective September 2, 2018.
The impacts resulting from adoption did not
have an impact on the Company’s Financial
Statements.
This update allows for the reclassification to retained
earnings of the tax effects stranded in Accumulated Other
Comprehensive Income resulting from The Tax Cuts and
Jobs Act. Early adoption is permitted.
September 2,
2018
The Company early adopted the standard
effective September 2, 2018 and reclassified
$1.5 million
from Accumulated other
comprehensive loss to Retained earnings
related to the tax impact of the Company’s
interest rate swap agreements.
June 3, 2018
the
income statement
This standard changes
presentation of the components of net periodic benefit cost
for defined benefit pension and other postretirement
benefit plans. Under the new guidance, entities must
present the service cost component of net periodic benefit
cost in the same income statement line items as other
employee compensation costs related
to services
rendered during the period. Other components of net
periodic benefit cost will be presented separately from the
line items that include the service cost. Early adoption is
permitted.
general
the Company
The Company retrospectively adopted the
standard effective June 3, 2018. Prior to
adoption,
recorded net
periodic benefit costs related to its defined
benefit pension and post-retirement medical
and
plans within Selling,
administrative expenses. As a result of
adoption, these costs are recorded within
Other, net. The Company retrospectively
reclassified these costs in the Condensed
Consolidated Statements of Comprehensive
Income for the fiscal years ended June 2,
2018 and June 3, 2017 from Selling, general
and administrative to Other, net. Refer to
Note 8 of the financial statements for further
information.
50 2019 Annual Report
Effective
Date
Effect on the Financial Statements or Other
Significant Matters
June 2,
2019
The Company is currently evaluating the impact of
adopting this guidance.
Recently Issued Accounting Standards Not Yet Adopted
Standard
Description
Derivatives and
Hedging:
Targeted
Improvements
to Accounting
for Hedging
Activities
Leases
the
financial
This update amends
the hedge accounting
recognition and presentation with the objectives of
improving
reporting of hedging
relationships to better portray the economic results
of an entity's risk management activities and
simplifying the application of hedge accounting. The
update expands the strategies eligible for hedge
accounting, relaxes the timing requirements of
hedge
effectiveness
assessments and permits the use of qualitative
assessments on an ongoing basis to assess hedge
effectiveness. The new guidance also requires new
disclosures and presentation.
documentation
and
Under the updated standard a lessee's rights and
obligations under most leases, including existing and
new arrangements, would be recognized as assets
and liabilities, respectively, on the balance sheet. The
standard must be adopted under a modified
is
retrospective approach and early adoption
permitted.
June 2,
2019
The Company has assembled a project team and has
made significant process towards implementation of
the lease accounting standard. The Company will adopt
the standard in fiscal 2020 using the modified-
retrospective transition approach. The Company has
substantially completed its identification of the global
lease population and the data migration to a lease
integration tool that will support the accounting and
disclosure requirements under the standard. Also, the
Company will elect the package of practical expedients.
The Company is in the process of finalizing its
accounting policies and internal control processes
related to the new standard. Upon adoption, the
Company expects to record lease liabilities and right-
of-use assets in the range of $250 million to $300
million.
Measurement of
Credit Losses
on Financial
Instruments
This guidance replaces the existing incurred loss
impairment model with an expected loss model and
requires consideration of a broader range of
reasonable and supportable information to inform
credit loss estimates.
May 31,
2020
The Company is currently evaluating the impact of
adopting this guidance.
Disclosure
Framework-
Changes to the
Disclosure
Requirements
for Fair Value
Measurement
Disclosure
Framework—
Changes to the
Disclosure
Requirements
for Defined
Benefit Plans
requirements
This update eliminates, adds and modifies certain
disclosure
value
measurements. Early adoption is permitted, and an
entity is also permitted to early adopt any removed
or modified disclosures and delay adoption of the
additional disclosures until their effective date.
fair
for
May 31,
2020
The Company is currently evaluating the impact of
adopting this guidance.
This update eliminates, adds and clarifies certain
disclosure requirements for employers that sponsor
defined benefit pension or other postretirement
plans. Early adoption is permitted.
May 30,
2021
The Company is currently evaluating the impact of
adopting this guidance.
Herman Miller, Inc. and Subsidiaries 51
2. Revenue from Contracts with Customers
Impact of Adoption
The Company adopted ASC 606 - Revenue from Contracts with Customers at the beginning of fiscal year 2019. The Company completed its
review of the impact of the new standard and identified certain key accounting policy changes that resulted from adopting the new standard.
These included changes to the identification of performance obligations for commercial contracts in which the Company sells directly to end
customers. Under previous accounting rules, which were codified under ASC 605, the Company generally delayed revenue recognition until
the products were shipped and installed as the Company had concluded that contracts that contained both products and services represented
a single, combined deliverable. However, under ASC 606, the Company has determined that products and services are distinct and as such,
represent separate performance obligations. The Company also determined that under ASC 606, certain product pricing elements related to its
direct customer sales should be recorded within Cost of sales rather than net within Net sales as had been historical practice under ASC 605.
The Company adopted ASC 606 using the modified retrospective approach and applied the guidance therein to all applicable contracts that
were not complete as of the date of adoption. As a result of these changes in accounting, the Company recorded a cumulative adjustment to
retained earnings of $1.9 million on the date of adoption. With the change in performance obligations under ASC 606, product revenue recognition
is accelerated on certain direct commercial customer sales. As a result, the cumulative adjustment recorded upon the adoption of ASC 606 had
the impact of reducing inventory for sales transactions that would have been recognized in a prior period under ASC 606 and recording unbilled
receivables for the amounts owed prior to invoicing. Additionally, the cumulative adjustment reflects the change in accrued expenses, including
income taxes payable, related to these sales transactions.
The cumulative impact to our Consolidated Balance Sheet as of June 3, 2018 was as follows:
(In millions)
Balance Sheet
Assets:
Unbilled accounts receivable
Inventories, net
Liabilities:
Accrued compensation and benefits
Other accrued liabilities
Equity:
Retained earnings
Balance at
June 2, 2018
Adjustments due
to ASC 606
Balance at
June 3, 2018
$
$
1.9
162.4
$
11.1
(7.1)
86.3
77.0
598.3
0.2
1.9
1.9
13.0
155.3
86.5
78.9
600.2
In accordance with the modified retrospective adoption rules per ASC 606, the Company has disclosed in the table below the differences in our
financial statements due to the adoption of the standard. The “As reported” column represents the financial statement values recorded in
accordance with ASC 606, while the “Legacy GAAP” column represents what the financial statement values would have been under ASC 605,
had the new standard not been adopted.
(In millions)
Statement of Comprehensive Income
Net sales
Cost of sales
Gross margin
Total operating expenses
Operating earnings
Income tax expense
Net earnings
Year Ended June 1, 2019
As reported
Performance
Obligation Change
Gross vs. Net
Change
Legacy GAAP
$
$
2,567.2
1,637.3
929.9
726.4
203.5
39.6
160.5
(21.5) $
(12.8)
(8.7)
(0.1)
(8.6)
(1.5)
(7.1)
(38.0) $
(38.0)
2,507.7
1,586.5
921.2
726.3
194.9
38.1
153.4
Herman Miller, Inc. and Subsidiaries 52
(In millions)
Balance Sheet
Assets:
As of June 1, 2019
As reported
Performance
Obligation Change
Gross vs. Net
Change
Legacy GAAP
Unbilled accounts receivable
Inventories, net
$
$
34.3
184.2
Liabilities:
Accrued compensation and benefits
Other accrued liabilities
Equity:
Retained earnings
85.5
99.1
712.7
(32.6)
17.6
(0.4)
(5.6)
(8.9)
$
1.7
201.8
85.1
93.5
703.8
There was no impact on Net Cash Provided by Operating Activities within the Company's Consolidated Statement of Cash Flows as a result of
adopting ASC 606.
Accounting Policies
The Company recognizes revenue when performance obligations, based on the terms of customer contracts, are satisfied. This happens when
control of goods and services based on the contract have been conveyed to the customer. Revenue for the sale of products is typically recognized
at the point in time when control transfers, generally upon transfer of title and risk of loss to the customer. Revenue for services, including the
installation of products by the Company's owned dealers, is recognized over time as the services are provided. The method of revenue recognition
may vary, depending on the type of contract with the customer, as noted in the section Disaggregated Revenue further below.
The Company's contracts with customers include master agreements and certain other forms of contracts, which do not reach the level of a
performance obligation until a purchase order is received from a customer. At the point in time that a purchase order under a contract is received
by the Company, the collective group of documents represent an enforceable contract between the Company and the customer. While certain
customer contracts may have a duration of greater than a year, all purchase orders are less than a year in duration. As of June 1, 2019, all
unfulfilled performance obligations are expected to be fulfilled in the next twelve months.
Variable consideration exists within certain contracts that the Company has with customers. When variable consideration is present in a contract
with a customer, the Company estimates the amount that should be included in the transaction price utilizing either the expected value method
or the most likely amount method, depending on the nature of the variable consideration. These estimates are primarily related to rebate programs
which involve estimating future sales amounts and rebate percentages to use in the determination of transaction price. Variable consideration
is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under
the contract will not occur. Adjustments to Net sales from changes in variable consideration related to performance obligations completed in
previous periods are not material to the Company's financial statements. Also, the Company has no contracts with significant financing
components.
The Company adopted the following accounting policies as a result of adopting the new standard on revenue recognition:
– Shipping and Handling Activities - the Company accounts for shipping and handling activities as fulfillment activities and these costs are
accrued within Cost of sales at the same time revenue is recognized.
– Sales Taxes - the Company does not record revenue for sales tax, value added tax or other taxes that are collected on behalf of government
entities. The Company’s revenue is recorded net of these taxes as they are passed through to the relevant government entities.
–
Incremental Costs of Obtaining a Contract - the Company has recognized incremental costs to obtain a contract as an expense when
incurred as the amortization period is less than one year.
– Significant Financing Component - the Company has not adjusted the amount of consideration to be received for any significant financing
components as the Company’s contracts have a duration of one year or less.
Herman Miller, Inc. and Subsidiaries 53
Disaggregated Revenue
The Company’s revenue is comprised primarily of sales of products and installation services. Depending on the type of contract, the method of
accounting and timing of revenue recognition may differ. Below, descriptions have been provided that summarize the Company’s different types
of contracts and how revenue is recognized for each.
– Single Performance Obligation - these contracts are transacted with customers and include only the product performance obligation. Most
commonly, these contracts represent master agreements with independent third-party dealers in which a purchase order represents the
customer contract, point of sale transactions through the Retail reportable segment, as well as customer purchase orders for the Maharam
subsidiary within the North America Contract reportable segment. For contracts that include a single performance obligation, the Company
records revenue at the point in time when title and risk of loss has transferred to the customer.
– Multiple Performance Obligations - these contracts are transacted with customers and include more than one performance obligation;
products, which are shipped to the customer by the Company and installation and other services, which are primarily fulfilled by independent
third-party dealers. For contracts that include multiple performance obligations, the Company records revenue for the product performance
obligation at the point in time when control transfers, generally upon transfer of title and risk of loss to the customer. In most cases, the
Company has concluded that it is the agent for the installation services performance obligation and as such, the revenue and costs of
these services are recorded net within Net sales in the Company’s Consolidated Statements of Comprehensive Income.
In certain instances, entities owned by the Company, rather than independent third-party dealers, perform installation and other services.
In these cases, Service revenue is generated by the Company’s entities that provide installation services, which include owned dealers,
and is recognized by the Company over time as the services are provided. For contracts with multiple performance obligations, the Company
allocates the transaction price to each performance obligation based on relative standalone selling prices.
– Other - these contracts are comprised mainly of alliance fee arrangements, whereby the Company earns revenue for allowing other furniture
sellers access to its dealer distribution channel, as well as other miscellaneous selling arrangements. Revenue from alliance contracts are
recorded at the point in time in which the sale is made by other furniture sellers through the Company’s sales channel.
Revenue disaggregated by contract type has been provided in the table below:
(In millions)
Net Sales:
Single performance obligation
Product revenue
Multiple performance obligations
Product revenue
Service revenue
Other
Total
Year Ended
June 1, 2019
$
$
2,155.0
390.0
12.6
9.6
2,567.2
Herman Miller, Inc. and Subsidiaries 54
Revenue disaggregated by product type and reportable segment has been provided in the table below:
(In millions)
North America Contract:
Systems
Seating
Freestanding and storage
Textiles
Other
Total North America Contract
International Contract:
Systems
Seating
Freestanding and storage
Other
Total International Contract
Retail:
Seating
Freestanding and storage
Other
Total Retail
Total
Year Ended
June 1, 2019
564.4
501.8
384.9
113.8
121.6
1,686.5
103.6
276.1
53.0
59.5
492.2
235.6
67.5
85.4
388.5
2,567.2
$
$
$
$
$
$
$
Refer to Note 14 of the Consolidated Financial Statements for further information related to our reportable segments.
Contract Assets and Contract Liabilities
The Company records contract assets and contract liabilities related to its revenue generating activities. Contract assets include certain
receivables from customers that are unconditional as all performance obligations with respect to the contract with the customer have been
completed. These amounts represent trade receivables and they are recorded within the caption “Accounts and notes receivable” in the
Consolidated Balance Sheets. The payment terms for the Company's customers differs depending on the type of customer. For third-party
dealers and commercial contract customers, standard credit terms apply. Sales transacted through the Company's direct to consumer channels
are generally paid for by the customer at point of sale.
Contract assets also include amounts that are conditional because certain performance obligations in the contract with the customer are
incomplete as of the balance sheet date. These contract assets generally arise due to contracts with the customer that include multiple performance
obligations, both the product that is shipped to the customer by the Company, as well as installation services provided by independent third-
party dealers. For these contracts, the Company recognizes revenue upon satisfaction of the product performance obligation. However, the
asset is conditional and the customer is not invoiced by the Company until the installation performance obligation is completed. These contract
assets are included in the caption "Unbilled accounts receivable" in the Consolidated Balance Sheets until all performance obligations in the
contract with the customer have been satisfied.
Contract liabilities represent deposits made by customers before the satisfaction of performance obligation(s) are complete and revenue is
recognized. Upon completion of the performance obligation(s) that the Company has with the customer based on the terms of the contract, the
liability for the customer deposit is relieved and revenue is recognized. These customer deposits are included within the caption “Customer
deposits” in the Consolidated Balance Sheets. During the year ended June 1, 2019, the Company recognized Net sales of $26.9 million related
to customer deposits there were included in the balance sheet as of June 2, 2018.
Herman Miller, Inc. and Subsidiaries 55
3. Acquisitions and Divestitures
Contract Furniture Dealerships
On July 31, 2017, the Company completed the sale of a wholly-owned contract furniture dealership in Vancouver, Canada for initial cash
consideration of $2.0 million. A pre-tax gain of $1.1 million was recognized as a result of the sale within the caption Selling, general and
administrative within the Consolidated Statements of Comprehensive Income.
On January 1, 2017, the Company completed the sale of a wholly-owned contract furniture dealership in Pennsylvania in exchange for a $3.0
million note receivable. A pre-tax gain of $0.7 million was recognized as a result of the sale within the caption Selling, general and administrative
within the Consolidated Statements of Comprehensive Income. The full balance of the note receivable was paid in the fourth quarter of fiscal
2019.
Maars Holding B.V.
On August 31, 2018, Herman Miller Holdings Limited, a wholly owned subsidiary of the Company, acquired 48.2% of the outstanding equity of
Global Holdings Netherlands B.V., which owns 100% of Maars Holding B.V. ("Maars”), a Harderwijk, Netherlands-based worldwide leader in
the design and manufacturing of interior wall solutions. The Company acquired its 48.2% ownership interest in Maars for approximately $6.1
million in cash. The entity is accounted for using the equity method of accounting as the Company has significant influence, but not control, over
the entity.
For the Maars equity method investment, the fair values assigned to the assets acquired were based on best estimates and assumptions as of
the reporting date and the valuation analysis was completed in the fourth quarter of fiscal 2019 with no differences noted from the preliminary
valuation.
Nine United Denmark A/S
On June 7, 2018, Herman Miller Holdings Limited, a wholly owned subsidiary of the Company, acquired 33% of the outstanding equity of Nine
United Denmark A/S, d/b/a HAY and subsequently renamed to HAY A/S ("HAY”), a Copenhagen, Denmark-based, design leader in furniture
and ancillary furnishings for residential and contract markets in Europe and Asia. The Company acquired its 33% ownership interest in HAY for
approximately $65.5 million in cash. The entity is accounted for using the equity method of accounting as the Company has significant influence,
but not control, over the entity.
The Company also acquired the rights to the HAY brand in North America under a long-term license agreement for approximately $4.8 million
million in cash. This licensing agreement is recorded as an amortizing intangible asset and is being amortized over its 15-year useful life. This
asset is recorded within Other amortizable intangibles, net within the Condensed Consolidated Balance Sheets.
For the Hay equity method investment, the fair values assigned to the assets acquired were based on best estimates and assumptions as of
the reporting date and the valuation analysis was completed in the third quarter of fiscal 2019 with no differences noted from the preliminary
valuation.
The Company is a party to options, that if exercised, would require the Company to purchase an additional 33% of the equity in HAY at fair
market value. These options may be exercised during a period commencing from the third quarter of fiscal 2020 and annually thereafter.
4. Inventories
(In millions)
Finished goods and work in process
Raw materials
Total
June 1, 2019
June 2, 2018
$
$
139.1 $
45.1
184.2 $
124.2
38.2
162.4
Inventories valued using LIFO amounted to $26.5 million and $25.5 million as of June 1, 2019 and June 2, 2018, respectively. If all inventories
had been valued using the first-in first-out method, inventories would have been $198.0 million and $175.3 million at June 1, 2019 and June 2,
2018, respectively.
56 2019 Annual Report
5. Investments in Nonconsolidated Affiliates
The Company has certain investments in entities that are accounted for using the equity method (“nonconsolidated affiliates”). The investments
are included in Other assets in the Consolidated Balance Sheets and the equity earnings are included in Equity earnings from nonconsolidated
affiliates, net of tax in the Consolidated Statements of Comprehensive Income. Refer to the tables below for the investment balances that are
included in the Consolidated Balance Sheets and for the equity earnings that are included in the Consolidated Statements of Comprehensive
Income.
(in millions)
Investments in nonconsolidated affiliates
June 1, 2019
June 2, 2018
$
89.0 $
16.8
(in millions)
Equity earnings from nonconsolidated affiliates
June 1, 2019
June 2, 2018
June 3, 2017
$
5.0 $
3.0 $
1.6
The Company had an ownership interest in seven nonconsolidated affiliates at June 1, 2019. Refer to the Company's ownership percentages
shown below:
Ownership Interest
Kvadrat Maharam Arabia DMCC
Kvadrat Maharam Pty Limited
Kvadrat Maharam Turkey JSC
Danskina B.V.
Naughtone Holdings Limited*
Global Holdings Netherlands B.V.
HAY A/S
*The minority shareholders of Naughtone Holdings Limited have substantive participation rights, including participating in decisions related to hiring, firing, and
compensation of executive management, as well as establishing the annual operating budget. As such, the entity is not consolidated.
June 1, 2019
50.0%
50.0%
50.0%
50.0%
52.5%
48.2%
33.0%
June 2, 2018
50.0%
50.0%
50.0%
50.0%
50.0%
—%
—%
Kvadrat Maharam
The Kvadrat Maharam nonconsolidated affiliates are distribution entities that are engaged in selling decorative upholstery, drapery and wall
covering products. At June 1, 2019 and June 2, 2018, the Company's investment value in Kvadrat Maharam Pty was $1.8 million and $1.9
million more than the Company's proportionate share of the underlying net assets, respectively. This difference was driven by a step-up in fair
value of the investment in Kvadrat Maharam Pty, stemming from the Maharam business combination. This amount is considered to be a
permanent basis difference.
Naughtone
In the fourth quarter of fiscal 2019 the Company increased its investment in Naughtone from 50% to 52.5% for approximately $2.0 million. At
June 1, 2019, the Company's investment value in Naughtone was $9.8 million more than the Company's proportionate share of the underlying
net assets, of which $2.0 million was being amortized over the remaining useful lives of the assets, while $7.8 million was considered a permanent
basis difference.
At June 2, 2018, the Company's investment value in Naughtone was $10.2 million more than the Company's proportionate share of the underlying
net assets, of which $2.4 million was being amortized over the remaining useful lives of the assets, while $7.8 million was considered a permanent
basis difference.
Maars
On August 31, 2018, Herman Miller Holdings Limited, a wholly owned subsidiary of the Company, acquired 48.2% of the outstanding equity of
Global Holdings Netherlands B.V., which owns 100% of Maars Holding B.V. ("Maars”), a Harderwijk, Netherlands-based worldwide leader in
the design and manufacturing of interior wall solutions. The Company acquired its 48.2% ownership interest in Maars for approximately $6.1
million in cash. The entity is accounted for using the equity method of accounting as the Company has significant influence, but not control, over
the entity.
For the Maars equity method investment, the fair values assigned to the assets acquired were based on best estimates and assumptions as of
the reporting date and the valuation analysis was completed in the fourth quarter of fiscal 2019 with no differences noted from the preliminary
valuation.
Herman Miller, Inc. and Subsidiaries 57
As of the August 31, 2018 acquisition date, the Company's investment value in Maars was $3.1 million more than the Company's proportionate
share of the underlying net assets. This amount represented the difference between the price that the Company paid to acquire 48.2% of the
outstanding equity and the carrying value of the net assets of Maars. Of this difference, $2.7 million was being amortized over the remaining
useful lives of the assets while, $0.4 million was considered a permanent difference.
At June 1, 2019, the Company's investment value in Maars was $2.7 million more than the Company's proportionate share of the underlying
net assets, of which $2.3 million was being amortized over the remaining useful lives of the assets, while $0.4 million was considered a permanent
basis difference.
HAY
On June 7, 2018, Herman Miller Holdings Limited, a wholly owned subsidiary of the Company, acquired 33% of the outstanding equity of Nine
United Denmark A/S, d/b/a HAY and subsequently renamed to HAY A/S ("HAY”), a Copenhagen, Denmark-based, design leader in furniture
and ancillary furnishings for residential and contract markets in Europe and Asia. The Company acquired its 33% ownership interest in HAY for
approximately $65.5 million in cash. The entity is accounted for using the equity method of accounting as the Company has significant influence,
but not control, over the entity.
For the HAY equity method investment, the fair values assigned to the assets acquired were based on best estimates and assumptions as of
the reporting date and the valuation analysis was completed in the third quarter of fiscal 2019 with no differences noted from the preliminary
valuation.
As of the June 7, 2018 acquisition date, the Company's investment value in HAY was $62.9 million more than the Company's proportionate
share of the underlying net assets. This amount represented the difference between the price that the company paid to acquire 33% of the
outstanding equity and the carrying value of the net assets of HAY. Of this difference, $26.6 million was being amortized over the remaining
useful lives of the assets while, $36.3 million was considered a permanent difference.
At June 1, 2019, the Company's investment value in HAY was $56.8 million more than the Company's proportionate share of the underlying net
assets, of which $22.6 million was being amortized over the remaining useful lives of the assets, while $34.2 million was considered a permanent
basis difference. The change in the permanent basis difference from the acquisition date is due to changes in foreign currency exchange rates.
Transactions with Nonconsolidated Affiliates
Sales to and purchases from nonconsolidated affiliates were as follows for the periods presented below:
(in millions)
Sales to nonconsolidated affiliates
Purchases from nonconsolidated affiliates
June 1, 2019
3.9
$
23.0
$
June 2, 2018
4.3
$
6.8
$
June 3, 2017
4.0
$
4.2
$
Balances due to or due from nonconsolidated affiliates were as follows for the periods presented below:
(in millions)
Receivables from nonconsolidated affiliates
Payables to nonconsolidated affiliates
6. Long-Term Debt
Long-term debt consisted of the following obligations:
(In millions)
Debt securities, 6.0%, due March 1, 2021
Syndicated Revolving Line of Credit, due September 2021
Construction-Type Lease
Supplier financing program
Total debt
Less: Current debt
Long-term debt
58 2019 Annual Report
$
$
$
June 1, 2019
June 2, 2018
$
$
0.7
1.2
$
$
0.9
1.0
June 1, 2019
June 2, 2018
$
50.0
225.0
6.9
3.1
285.0 $
(3.1)
281.9
$
50.0
225.0
7.0
3.8
285.8
(10.8)
275.0
The Company's syndicated revolving line of credit provides the Company with up to $400 million in revolving variable interest borrowing capacity
and includes an "accordion feature" allowing the Company to increase, at its option and subject to the approval of the participating banks, the
aggregate borrowing capacity of the facility by $200 million. The facility expires in September 2021 and outstanding borrowings bear interest at
rates based on the prime rate, federal funds rate, LIBOR or negotiated rates as outlined in the agreement. Interest is payable periodically
throughout the period if borrowings are outstanding.
On January 3, 2018, the Company borrowed $225.0 million on its existing revolving line of credit. Of these proceeds, $150.0 million was used
to repay its Series B senior notes upon maturity, while the rest of the proceeds was designated for general business purposes.
As of June 1, 2019, the total debt outstanding related to borrowings under the syndicated revolving line of credit was $225.0 million. Available
borrowings against this facility were $165.0 million due to $10.0 million outstanding letters of credit. As of June 2, 2018, available borrowings
against this facility were $166.8 million due to $8.2 million related to outstanding letters of credit.
The unsecured senior revolving credit facility restrict, without prior consent, our borrowings, capital leases and the sale of certain assets. In
addition, we have agreed to maintain certain financial performance ratios, which include a maximum leverage ratio covenant, which is measured
by the ratio of debt to trailing four quarter adjusted EBITDA (as defined in the credit agreement) and is required to be less than 3.5:1, except
that we may elect, under certain conditions, to increase the maximum Leverage Ratio to 4:1 for four consecutive fiscal quarter end dates. The
covenants also require a minimum interest coverage ratio, which is measured by the ratio of trailing four quarter EBITDA to trailing four quarter
interest expense (as defined in the credit agreement) and is required to be greater than 4:1. Adjusted EBITDA is generally defined in the credit
agreement as EBITDA adjusted by certain items which include non-cash share-based compensation, non-recurring restructuring costs and
extraordinary items. At June 1, 2019 and June 2, 2018, the Company was in compliance with all of these restrictions and performance ratios.
Supplier Financing Program
The Company has an agreement with a third party financial institution to provide a platform that allows certain participating suppliers the ability
to finance payment obligations from the Company. Under this program, participating suppliers may finance payment obligations of the Company,
prior to their scheduled due dates, at a discounted price to the third party financial institution.
The Company has lengthened the payment terms for certain suppliers that have chosen to participate in the program. As a result, certain amounts
due to suppliers have payment terms that are longer than standard industry practice and as such, these amounts have been excluded from the
caption “Accounts payable” in the Consolidated Balance Sheets as the amounts have been accounted for by the Company as a current debt
obligation. Accordingly, $3.1 million and $3.8 million have been recorded within the caption “Other accrued liabilities” for the periods ended June
1, 2019 and June 2, 2018, respectively.
Construction-Type Lease
During fiscal 2015, the Company entered into a lease agreement for the occupancy of a new studio facility in Palo Alto, California which runs
through fiscal 2026. In fiscal 2017, the Company became the deemed owner of the leased building for accounting purposes as a result of the
Company's involvement during the construction phase of the project. The lease is therefore accounted for as a financing transaction and the
building and related financing liability were initially recorded at fair value in the Consolidated Balance Sheets within both Construction in progress
and Other accrued liabilities. The fair value of the building and financing liability was determined through a blend of an income approach,
comparable property sales approach and a replacement cost approach.
During the first quarter of fiscal 2019, the construction was substantially completed, and the property was placed in service. As a result, the
Company began depreciating the assets over their estimated useful lives. The Company also reclassified the related financing liability to Long-
term debt. Additionally, the Company began allocating its monthly lease payments between land rent, which is recorded as an operating lease
expense, interest expense and the reduction of the related lease obligation. The imputed interest rate on the financing liability is 2.9%, the
Company's incremental borrowing rate. The carrying value of the building was $6.7 million and the related financing liability was $6.9 million at
June 1, 2019. The carrying value of the building and the related financing liability were both $7.0 million at June 2, 2018.
Annual maturities of debt for the five fiscal years subsequent to June 1, 2019 are as shown in the table below.
(In millions)
2020
2021
2022
2023
2024
Thereafter
$
$
$
$
$
$
3.1
50.0
225.0
—
—
6.9
Herman Miller, Inc. and Subsidiaries 59
7. Operating Leases
The Company leases real property and equipment under agreements that expire on various dates. Certain leases contain renewal provisions
and generally require the Company to pay utilities, insurance, taxes, and other operating expenses.
Future minimum rental payments required under operating leases that have non-cancelable lease terms as of June 1, 2019, are as follows:
(In millions)
2020
2021
2022
2023
2024
Thereafter
$
$
$
$
$
$
51.7
46.8
42.9
39.0
33.5
101.9
Total rental expense charged to operations was $55.9 million, $49.3 million and $45.3 million, in fiscal 2019, 2018 and 2017, respectively.
Substantially all such rental expense represented the minimum rental payments under operating leases.
60 2019 Annual Report
8. Employee Benefit Plans
The Company maintains retirement benefit plans for substantially all of its employees.
Pension Plans and Post-Retirement Medical Insurance
The Company offers certain employees retirement benefits under domestic defined benefit plans. The Company provides healthcare benefits
to employees who retired from service on or before a qualifying date in 1998. As of the qualifying date, the Company discontinued offering post-
retirement medical to future retirees. Benefits to qualifying retirees under this plan are based on the employee's years of service and age at the
date of retirement. In addition to the domestic pension and retiree healthcare plan, one of the Company's wholly owned foreign subsidiaries has
a defined-benefit pension plan based upon an average final pay benefit calculation. The measurement date for the Company's remaining
domestic and international pension plans, as well as its post-retirement medical plan, is the last day of the fiscal year.
Benefit Obligations and Funded Status
The following table presents, for the fiscal years noted, a summary of the changes in the projected benefit obligation, plan assets and funded
status of the Company's domestic and international pension plans and post-retirement plan:
(In millions)
Change in benefit obligation:
Benefit obligation at beginning of year
Interest cost
Plan Amendments
Foreign exchange impact
Actuarial loss (gain)
Benefits paid
Benefit obligation at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Foreign exchange impact
Employer contributions
Benefits paid
Fair value of plan assets at end of year
Funded status:
Under funded status at end of year
$
$
$
$
$
Pension Benefits
2019
2018
Post-Retirement Benefits
2019
2018
Domestic
International
Domestic
International
1.0 $
—
—
—
0.1
(0.1)
1.0 $
— $
—
—
0.1
(0.1)
— $
105.9 $
2.7
0.9
(6.0)
9.7
(4.1)
109.1 $
94.6 $
2.5
(5.1)
0.3
(4.1)
88.2
$
1.0 $
0.1
—
—
—
(0.1)
1.0 $
— $
—
—
0.1
(0.1)
— $
113.8 $
2.7
—
4.2
(12.2)
(2.6)
105.9 $
80.5 $
1.2
2.8
12.7
(2.6)
94.6
$
4.0 $
0.1
—
—
(0.3)
(0.5)
3.3 $
— $
—
—
0.5
(0.5)
— $
5.0
0.1
—
—
(0.5)
(0.6)
4.0
—
—
—
0.6
(0.6)
—
(1.0) $
(20.9) $
(1.0) $
(11.3) $
(3.3) $
(4.0)
Components of the amounts recognized in the Consolidated Balance Sheets:
— $
Current liabilities
(20.9) $
Non-current liabilities
(0.1) $
(0.9) $
$
$
(0.1) $
(0.9) $
— $
(11.3) $
(0.6) $
(2.7) $
Components of the amounts recognized in Accumulated other comprehensive loss before the effect of income taxes:
— $
Prior service cost
$
0.3
Unrecognized net actuarial loss (gain)
$
0.3
Accumulated other comprehensive loss
— $
$
0.3
$
0.3
— $
$
$
0.8
47.3
48.1
— $
(1.3) $
(1.3) $
40.8
40.8
$
$
$
$
$
$
(0.6)
(3.4)
—
(1.1)
(1.1)
The Company retrospectively adopted ASU 2017-07 - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement
Benefit Cost on June 3, 2018. As the Company's pension and post retirement medical plans are frozen and not open to new plan participants,
these plans no longer have a service component in net periodic benefit cost. Prior to adoption, the Company recorded net periodic benefit costs
related to its defined benefit pension and post-retirement medical plans within Selling, general and administrative expenses. As a result of
adoption, these costs are recorded within Other, net. The Company retrospectively reclassified $1.4 million and $0.3 million of net periodic
benefit cost in the Consolidated Statements of Comprehensive Income for fiscal years 2018 and 2017, respectively, from Selling, general and
administrative to Other, net.
Herman Miller, Inc. and Subsidiaries 61
The accumulated benefit obligation for the Company's domestic pension benefit plans totaled $1.0 million as of the end of both fiscal 2019 and
fiscal 2018. For its international plans, the accumulated benefit obligation totaled $105.4 million and $102.2 million as of fiscal 2019 and fiscal
2018, respectively. The following table summarizes the totals for pension plans with accumulated benefit obligations in excess of plan assets:
Pension Plans with Accumulated Benefit Obligation in Excess of Plan Assets
(In millions)
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
2019
2018
$
$
$
110.1 $
106.4 $
$
88.2
106.9
103.1
94.6
The following table is a summary of the annual cost of the Company's pension and post-retirement plans:
Components of Net Periodic Benefit Costs and Other Changes Recognized in Other Comprehensive Income (Loss):
(In millions)
Domestic:
Interest cost
Net periodic benefit cost
International:
Interest cost
Expected return on plan assets
Net amortization
Net periodic benefit cost
$
$
$
$
Pension Benefits
2018
2019
2017
Post-Retirement Benefits
2018
2017
2019
— $
— $
0.1 $
$
0.1
0.1
0.1
$
$
0.1 $
0.1 $
0.1 $
0.1 $
0.2
0.2
2.7
(4.5)
2.8
1.0
$
$
2.7
(5.6)
4.2
1.3
$
$
2.7
(4.7)
2.2
0.2
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income (Loss):
(In millions)
Domestic:
Net actuarial gain
Total recognized in other comprehensive loss
International:
Net actuarial (gain) loss
Net amortization
Total recognized in other comprehensive loss
Pension Benefits
Post-Retirement Benefits
2019
2018
2019
2018
$
$
$
$
0.1
0.1
11.7
(2.7)
9.0
$
$
$
$
— $
— $
(0.3) $
(0.3) $
(0.5)
(0.5)
(7.7)
(4.2)
(11.9)
The net actuarial loss, included in accumulated other comprehensive loss (pretax), expected to be recognized in net periodic benefit cost during
fiscal 2020 is $3.3 million.
Actuarial Assumptions
The weighted-average actuarial assumptions used to determine the benefit obligation amounts and the net periodic benefit cost for the Company's
pension and post-retirement plans are as follows:
The weighted-average used in the determination of net periodic benefit cost:
2019
2018
2017
Domestic
International
Domestic
International
Domestic
(Percentages)
Discount rate
Compensation increase rate
Expected return on plan assets
3.99
n/a
n/a
2.87
3.10
4.80
The weighted-average used in the determination of the projected benefit obligations:
Discount rate
Compensation increase rate
2.39
3.20
3.47
n/a
62 2019 Annual Report
3.53
n/a
n/a
3.99
n/a
2.49
3.25
6.10
2.87
3.10
3.51
n/a
n/a
3.53
n/a
International
3.43
2.95
6.10
2.49
3.25
The Company uses a full yield curve approach to estimate the interest component of net periodic benefit cost for pension and other postretirement
benefits. This method applies the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant
projected cash flows.
In calculating post-retirement benefit obligations for fiscal 2020, a 6.7 percent annual rate of increase in the per capita cost of covered healthcare
benefits was assumed for 2019, decreasing gradually to 4.3 percent by 2038 and remaining at that level thereafter. For purposes of calculating
post-retirement benefit costs, a 7.1 percent annual rate of increase in the per capita cost of covered healthcare benefits was assumed for 2019,
decreasing gradually to 4.3 percent by 2038 and remaining at that level thereafter.
Changes in assumed health care cost-trend rates is not expected to have a significant impact on the post-employment liability.
Plan Assets and Investment Strategies
The Company's international employee benefit plan assets consist mainly of listed fixed income obligations and common/collective trusts. The
Company's primary objective for invested pension plan assets is to provide for sufficient long-term growth and liquidity to satisfy all of its benefit
obligations over time. Accordingly, the Company has developed an investment strategy that it believes maximizes the probability of meeting this
overall objective. This strategy includes the development of a target investment allocation by asset category in order to provide guidelines for
making investment decisions. This target allocation emphasizes the long-term characteristics of individual asset classes as well as the
diversification among multiple asset classes. In developing its strategy, the Company considered the need to balance the varying risks associated
with each asset class with the long-term nature of its benefit obligations. The Company's strategy moving forward will be to increase the level
of fixed income investments as the funding status improves, thereby more closely matching the return on assets with the liabilities of the plans.
The Company utilizes independent investment managers to assist with investment decisions within the overall guidelines of the investment
strategy. The target asset allocation at the end of fiscal 2019 and asset categories for the Company's primary international pension plan for
fiscal 2019 and 2018 are as follows:
Targeted Asset Allocation Percentage
Percentage of Plan Assets at Year End
Asset Category
Fixed income
Common collective trusts
Total
(In millions)
Asset Category
Cash and cash equivalents
Foreign government obligations
Common collective trusts-balanced
Total
(In millions)
Asset Category
Cash and cash equivalents
Foreign government obligations
Common collective trusts-balanced
Total
Cash Flows
2019
35
65
2018
35
65
2019
2018
33
67
100
International Plan as of June 1, 2019
Level 2
Total
Level 1
$
$
$
$
— $
—
—
— $
— $
29.3
58.9
88.2
$
International Plan as of June 2, 2018
Level 2
Total
Level 1
0.2
—
—
0.2
$
$
— $
33.4
61.0
94.4
$
36
64
100
—
29.3
58.9
88.2
0.2
33.4
61.0
94.6
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 2019, the Company
made total cash contributions of $0.9 million to its benefit plans. In fiscal 2018, the Company made total cash contributions of $13.4 million to
its benefit plans.
Herman Miller, Inc. and Subsidiaries 63
The following represents a summary of the benefits expected to be paid by the plans in future fiscal years. These expected benefits were
estimated based on the same actuarial valuation assumptions used to determine benefit obligations at June 1, 2019.
(In millions)
2020
2021
2022
2023
2024
2025-2029
Pension Benefits
Domestic
Pension Benefits
International
Post-Retirement
Benefits
$
$
$
$
$
$
0.1
0.1
0.1
0.1
0.1
0.3
$
$
$
$
$
$
1.8
1.9
2.3
2.1
2.3
16.7
$
$
$
$
$
$
0.5
0.4
0.4
0.4
0.3
1.1
Profit Sharing, 401(k) Plan, and Core Contribution
Substantially all of the Company’s domestic employees are eligible to participate in a defined contribution retirement plan, primarily the Herman
Miller, Inc. profit sharing and 401(k) plan (the "plan"). Employees under the plan are eligible to begin participating on their date of hire. Until
June 4, 2017, the plan provided for discretionary contributions for eligible participants, payable in the Company's common stock, of not more
than 6 percent of employees' wages based on the Company's financial performance. Effective June 4, 2017, the Company discontinued the
Employer Profit Sharing Contribution and instead, began allocating those funds to other components of pay and retirement. Under the plan the
Company matches 100 percent of employee contributions to their 401(k) accounts up to 3 percent of their pay. Effective September 3, 2017,
the Company increased the Employer Matching Contribution from 3 percent to 4 percent for all eligible employees. A core contribution of 4
percent is also included for most participants of the plan. There was an additional 1 percent contribution added to the quarterly Core Contribution
for the quarter prior to the increased Employer Matching Contribution effective September 3, 2017. The Company’s other defined contribution
retirement plans may provide for matching contributions, non-elective contributions and discretionary contributions as declared by management.
The cost of the Herman Miller, Inc. profit sharing contribution during fiscal 2017 was $6.0 million. No profit sharing contribution was made in
fiscal 2019 or fiscal 2018. The expense recorded for the Company's 401(k) matching contributions and core contributions was approximately
$25.4 million, $24.9 million and $22.8 million in fiscal years 2019, 2018 and 2017, respectively.
9. Common Stock and Per Share Information
The following table reconciles the numerators and denominators used in the calculations of basic and diluted EPS for each of the last three
fiscal years:
(In millions, except shares)
Numerator:
Numerator for both basic and diluted EPS, Net earnings attributable to Herman Miller, Inc. $
2019
2018
2017
160.5 $
128.1 $
123.9
Denominator:
Denominator for basic EPS, weighted-average common shares outstanding
Potentially dilutive shares resulting from stock plans
Denominator for diluted EPS
59,011,945
369,846
59,381,791
59,681,268
630,037
60,311,305
59,871,805
682,784
60,554,589
Equity awards of 218,037 shares, 348,089 shares and 764,154 shares of common stock were excluded from the denominator for the computation
of diluted earnings per share for the fiscal years ended June 1, 2019, June 2, 2018 and June 3, 2017, respectively, because they were anti-
dilutive. The Company has certain share-based payment awards that meet the definition of participating securities.
Common Stock
The Company has two share repurchase plans authorized by the Board of Directors on September 25, 2007 and January 16, 2019, which
provide share repurchase authorization of $550.0 million with no specified expiration date. The approximate dollar value of shares available
for purchase under the plans at June 1, 2019 was $264.2 million. During fiscal year 2019, 2018, and 2017, shares repurchased and retired
totaled 1,326,023, 1,356,156, and 765,556 shares respectively.
64 2019 Annual Report
10. Stock-Based Compensation
The Company utilizes equity-based compensation incentives as a component of its employee and non-employee director and officer
compensation philosophy. Currently, these incentives consist principally of stock options, restricted stock, restricted stock units and performance
share units. The Company also offers a stock purchase plan for its domestic and certain international employees. The Company issues shares
in connection with its share-based compensation plans from authorized, but unissued, shares. At June 1, 2019 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 was as follows
for the periods indicated:
(In millions)
Employee stock purchase program
Stock option plans
Restricted stock units
Performance share units
Total
Tax benefit
June 1, 2019
0.3
$
(0.4)
4.6
2.8
7.3
$
$
1.6
$
$
$
June 2, 2018
June 3, 2017
0.3
2.6
3.9
0.9
7.7
2.3
$
$
$
0.3
2.0
3.6
2.8
8.7
3.1
As of June 1, 2019, total pre-tax stock-based compensation cost not yet recognized related to non-vested awards was approximately $7.1
million. The weighted-average period over which this amount is expected to be recognized is 0.96 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 62,957,
67,335, and 68,547 for the fiscal years ended 2019, 2018 and 2017 respectively.
Stock Option Plans
The Company grants options to purchase the Company's stock to certain key employees and non-employee directors 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 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 65
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:
Risk-free interest rates (1)
Expected term of options (2)
Expected volatility (3)
Dividend yield (4)
Weighted-average grant-date fair value of stock options:
2019
2.65-2.70%
4.4 years
27%
2.18-2.33%
2018
1.79%
4.6 years
26%
2.23%
2017
1.01%
4.0 years
26%
2.13%
Granted with exercise prices equal to the fair market value of the stock on the date of grant $
8.05
$
6.39
$
5.50
(1) Represents term-matched, zero-coupon risk-free rate from the Treasury Constant Maturity yield curve, continuously compounded.
(2) Represents historical settlement data, using midpoint scenario with 1-year grant date filter assumption for outstanding options.
(3) The blended volatility approach was used. 90% term-matched historical volatility from daily stock prices and 10% percent weighted average
implied volatility from the 90 days preceding the grant date.
(4) Represents the quarterly dividend divided by the three-month average stock price as of the grant date, annualized and continuously
compounded.
The following is a summary of the transactions under the Company's stock option plans:
Outstanding at June 2, 2018
Granted at market
Exercised
Forfeited or expired
Outstanding at June 1, 2019
Ending vested + expected to vest
Exercisable at end of period
Shares Under
Option
Weighted-Average
Exercise Prices
Aggregate
Intrinsic Value
(in millions)
Weighted-Average
Remaining Contractual
Term (Years)
$
1,063,249
156,008
$
(347,248) $
(81,950) $
$
790,059
$
790,059
$
282,985
$
30.33
38.23
28.84
33.94
32.17 $
$
32.17
$
28.51
2.9
3.0
3.0
2.0
7.45
5.81
5.81
4.42
The weighted-average remaining recognition period of the outstanding stock options at June 1, 2019 was 1.12 years. The total pre-tax intrinsic
value of options exercised during fiscal 2019, 2018 and 2017 was $3.3 million, $5.0 million and $1.3 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 2019 from the exercise of stock options was approximately $10 million.
Restricted Stock Units
The Company grants restricted stock units to certain key employees. 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:
Outstanding at June 2, 2018
Granted
Forfeited
Released
Outstanding at June 1, 2019
Ending vested + expected to vest
66 2019 Annual Report
Share
Units
Weighted Average
Grant-Date
Fair Value
Aggregate
Intrinsic Value (in
millions)
Weighted-Average
Remaining Contractual
Term (Years)
481,027
$
$
91,304
(31,922) $
(229,128) $
$
311,281
$
311,281
32.20 $
37.81
35.94
31.40
33.93 $
33.93 $
15.8
11.0
11.0
1.28
1.10
1.10
The weighted-average remaining recognition period of the outstanding restricted stock units at June 1, 2019, was 0.99 years. The fair value of
the share units that vested during the twelve months ended June 1, 2019, was $8.4 million. The weighted average grant-date fair value of
restricted stock units granted during 2019, 2018, and 2017 was $37.81, $35.28 and $31.83 respectively.
Performance Share Units
The Company grants performance share units to certain key employees. 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:
Outstanding at June 2, 2018
Granted
Forfeited
Released
Outstanding at June 1, 2019
Ending vested + expected to vest
Share
Units
Weighted Average
Grant-Date Fair
Value
$
374,560
207,568
$
(19,093) $
(239,679) $
$
323,356
$
323,356
30.76
36.37
35.90
31.55
33.48
33.48
Aggregate
Intrinsic
Value (in millions)
$
12.3
$
$
11.5
11.5
Weighted-Average
Remaining Contractual
Term (Years)
1.01
1.13
1.13
The weighted-average remaining recognition period of the outstanding performance share units at June 1, 2019, was 1.06 years. The fair value
for shares that vested during the twelve months ended June 1, 2019, was $9.3 million. The weighted average grant-date fair value of performance
share units granted during 2019, 2018, and 2017 was $36.37, $31.28, and $29.40 respectively.
Herman Miller Consumer Holdings Stock (HMCH) Option Plan
Certain employees were granted options to purchase stock of HMCH at a price not less than the market price of HMCH common stock on the
date of grant. For the grants of options under the award program, options are potentially exercisable between one year and five years from date
of grant and expire at the end of the window period that follows the fifth anniversary of the grant date. Vesting is based on the performance of
HMCH over a period of five years. Certain of these options have been classified as liability awards as the holders have the right to put the
underlying shares to the Company immediately upon exercise. Given this, the awards are measured at fair value at the end of each reporting
period and compensation expense is adjusted accordingly to reflect the fair value over the requisite service period. The Company estimates
the issuance date fair value of HMCH stock options on the date of grant using the Black-Scholes model. In fiscal 2019 the options did not meet
their performance targets resulting in cancellation of awards and reversal of the related expense and liability. The expense reversal for these
awards was $1.1 million during fiscal 2019 and the related liability for these awards was zero as of the end of fiscal 2019.
The following weighted-average assumptions were used to value the liability associated with HMCH stock options as of June 2, 2018:
Risk-free interest rates (1)
Expected term of options (2)
Expected volatility (3)
Dividend yield
Strike price
Per share value (4)
(1) Represents the U.S. Treasury yield over the same period as the expected option term.
(2) Represents the period of time that options granted are expected to be outstanding.
(3) Amount is determined based on analysis of historical price volatility of the common stock of peer companies over a period equal to the
2.29%
1.1 years
35%
not applicable
30.64
8.24
2018
expected term of the options.
(4) Based on the Black-Scholes formula.
Herman Miller, Inc. and Subsidiaries 67
Outstanding at June 2, 2018
Exercised
Forfeited
Outstanding at June 1, 2019
Exercisable at end of period
Shares Under
Option
Weighted-Average
Exercise Prices
Aggregate
Intrinsic Value (in
millions)
Weighted-Average
Remaining Contractual
Term (Years)
544,126
$
(4,861) $
(468,558) $
$
70,707
$
70,707
24.04
7.82
24.39
22.80
22.80
$
$
$
3.6
0.5
0.5
1.20
0.20
0.20
The outstanding balance at June 1, 2019 in the preceding table represents fully vested options. The aggregate intrinsic value in the preceding
table represents the total pre-tax intrinsic value, based on the HMCH market price, less the strike price, as of the end of the period presented,
which would have been received by the option holders had all option holders exercised in-the-money options as of that date.
Deferred Compensation Plan
The Herman Miller, Inc. Executive Equalization Retirement Plan is a supplemental deferred compensation plan and was made available for
salary deferrals and Company contributions beginning in January 2008. The plan is available to a select group of management or highly
compensated employees who are selected for participation by the Executive Compensation Committee of the Board of Directors. The plan
allows participants to defer up to 50 percent of their base salary and up to 100 percent of their incentive cash bonus. Company contributions to
the plan “mirror” the amounts the Company would have contributed to the various qualified retirement plans had the employee's compensation
not been above the IRS statutory ceiling ($280,000 in 2019). The Company does not guarantee a rate of return for these funds. Instead,
participants make investment elections for their deferrals and Company contributions. Investment options are the same as those available under
the Herman Miller Profit Sharing and 401(k) Plan, except for Company stock, which is not an investment option under this plan.
The Nonemployee Officer and Director Deferred Compensation Plan allows the Board of Directors of the Company to defer a portion of their
annual director fee. Investment options are the same as those available under the Herman Miller Profit Sharing and 401(k) Plan, including
Company stock.
In accordance with the terms of the Executive Equalization Plan and Nonemployee Officer and Director Deferred Compensation Plan, the salary
and bonus deferrals, Company contributions and director fee deferrals have been placed in a Rabbi trust. The assets in the Rabbi trust remain
subject to the claims of creditors of the Company and are not the property of the participant. Investments in securities other than the Company's
common stock are included within the Other assets line item, while investments in the Company's stock are included in the line item Key executive
deferred compensation in the Company's Consolidated Balance Sheets. A liability of the same amount is recorded on the Consolidated Balance
Sheets within the Other liabilities line item. Investment assets are classified as trading, and accordingly, 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:
Shares of common stock
Shares through the deferred compensation program
2019
2018
2017
10,185
7,619
8,828
2,207
9,982
2,582
68 2019 Annual Report
11. Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law in the United States. The effects of the Act included the
reduction of the federal corporate income tax rate from 35 percent to 21 percent and a new participation exemption system of taxation on foreign
earnings, among other provisions.
In accordance with Staff Accounting Bulletin 118, for the year ended June 2, 2018, the Company recorded a provisional tax benefit of $3.1 million
from the impact of the Act, primarily related to the one-time U.S. tax liability on certain undistributed foreign earnings and the remeasurement
of current and deferred tax liabilities. Subsequently, as the U.S. Treasury Department issued additional guidance, the Company recorded
adjustments to the provisional tax benefit. During the year ended June 1, 2019, the Company completed its accounting for all the effects of the
Act and recorded adjustments to the provisional amounts primarily for the one-time U.S. tax liability on certain undistributed foreign earnings
and also an adjustment related to foreign tax credits to increase the income tax benefit from the Act by $1.0 million.
The U.S. Treasury Department and the Internal Revenue Service are expected to continue issuing additional guidance related to the Act, which
could have a material impact to the provision for income taxes. If applicable, the Company would recognize any adjustments in the provision
for income taxes in the period additional guidance is issued.
For tax years beginning after December 31, 2017, the Act subjects a U.S. shareholder to tax on global intangible low-taxed income (“GILTI”)
earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that
an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI
in future years or provide for the tax expense related to GILTI in the year the tax is incurred. The Company will account for tax expense related
to GILTI in the year the tax is incurred.
The components of earnings before income taxes are as follows:
(In millions)
Domestic
Foreign
Total
The provision (benefit) for income taxes consists of the following:
(In millions)
Current: Domestic - Federal
Domestic - State
Foreign
Deferred: Domestic - Federal
Domestic - State
Foreign
Total income tax provision
2019
2018
2017
136.2
58.9
195.1
$
$
121.6
46.5
168.1
$
$
131.4
46.2
177.6
2019
2018
2017
19.0
6.4
12.9
38.3
1.0
(0.2)
0.5
1.3
39.6
$
$
30.2
4.3
10.7
45.2
(4.1)
0.1
1.2
(2.8)
42.4
$
$
28.7
2.3
11.1
42.1
9.2
2.8
1.0
13.0
55.1
$
$
$
$
Herman Miller, Inc. and Subsidiaries 69
The following table represents a reconciliation of income taxes at the United States statutory rate of 21% for 2019, 29.1% for 2018, and 35%
for 2017 with the effective tax rate as follows:
(In millions)
Income taxes computed at the United States Statutory rate
Increase (decrease) in taxes resulting from:
Remeasurement of U.S. deferred tax assets and liabilities due to the Tax Act
U.S. tax liability on undistributed foreign earnings due to the Tax Act
Foreign-derived intangible income
Global intangible low-taxed income
Foreign statutory rate differences
Manufacturing deduction under the American Jobs Creation Act of 2004
State taxes
United Kingdom patent box deduction for research and development
Research and development credit
Foreign tax credit
Other, net
Income tax expense
Effective tax rate
2019
2018
2017
$
41.0
$
49.0
$
62.2
(0.2)
(2.6)
(3.1)
6.9
1.9
—
4.9
(1.9)
(3.4)
(5.7)
1.8
39.6
20.3%
$
(8.9)
9.0
—
—
(4.0)
(2.7)
3.3
(1.8)
(2.4)
(2.4)
3.3
42.4
25.2%
$
—
—
—
—
(5.7)
(3.4)
3.8
(2.6)
(1.4)
(0.6)
2.8
55.1
31.1%
$
The tax effects and types of temporary differences that give rise to significant components of the deferred tax assets and liabilities at June 1,
2019 and June 2, 2018, are as follows:
(In millions)
Deferred tax assets:
Compensation-related accruals
Accrued pension and post-retirement benefit obligations
Deferred revenue
Inventory related
Reserves for uncollectible accounts and notes receivable
Other reserves and accruals
Warranty
State and local tax net operating loss carryforwards and credits
Federal net operating loss carryforward
Foreign tax net operating loss carryforwards and credits
Accrued step rent and tenant reimbursements
Other
Subtotal
Valuation allowance
Total
Deferred tax liabilities:
Book basis in property in excess of tax basis
Intangible assets
Other
Total
2019
2018
$
$
$
$
13.1
7.2
6.1
1.2
0.7
8.1
12.3
2.5
1.4
9.1
4.2
4.0
69.9
(10.4)
59.5
(26.6)
(34.6)
(2.1)
(63.3)
$
$
$
$
15.3
6.6
5.6
1.0
0.6
5.2
11.9
2.3
1.7
10.0
3.8
3.9
67.9
(10.3)
57.6
(25.5)
(32.3)
(6.9)
(64.7)
The future tax benefits of net operating loss (NOL) carry-forwards and foreign tax credits are recognized to the extent that realization of these
benefits is considered more likely than not. The Company bases this determination on the expectation that related operations will be sufficiently
profitable or various tax planning strategies will enable the Company to utilize the NOL carry-forwards and/or foreign tax credits. To the extent
that available evidence about the future raises doubt about the realization of these tax benefits, a valuation allowance is established.
At June 1, 2019, the Company had state and local tax NOL carry-forwards of $25.7 million, the state tax benefit of which is $1.4 million, which
have various expiration periods from 1 to 21 years. The Company also had state credits with a state tax benefit of $1.1 million, which expire in
1 to 6 years. For financial statement purposes, the NOL carry-forwards and state tax credits have been recognized as deferred tax assets,
subject to a valuation allowance of $1.3 million.
70 2019 Annual Report
At June 1, 2019, the Company had federal NOL carry-forwards of $6.6 million, the tax benefit of which is $1.4 million, which expire in 10 years.
For financial statement purposes, the NOL carry-forwards have been recognized as deferred tax assets.
At June 1, 2019, the Company had federal deferred assets of $2.2 million, the tax benefit of which is $0.5 million, which is related to investments
in various foreign joint ventures. For financial statement purposes, the assets have been recognized as deferred tax assets, subject to a valuation
allowance of $0.5 million.
At June 1, 2019, the Company had foreign net operating loss carry-forwards of $41.2 million, the tax benefit of which is $9.1 million, which have
expiration periods from 9 years to an unlimited term. For financial statement purposes, the NOL carry-forwards have been recognized as deferred
tax assets, subject to a valuation allowance of $7.6 million.
At June 1, 2019, the Company had foreign deferred assets of $5.5 million, the tax benefit of which is $1.0 million, which is related to various
deferred taxes in Hong Kong and Brazil as well as buildings in the United Kingdom. For financial statement purposes, the assets have been
recognized as deferred tax assets, subject to a valuation allowance of $1.0 million.
The Company has recorded transition tax on undistributed foreign earnings as required by the Act. No other provision was made for income
taxes that may result from future remittances of the undistributed earnings of foreign subsidiaries that are determined to be indefinitely reinvested,
which was $223.8 million on June 1, 2019. Determination of the total amount of unrecognized deferred income tax on 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 3, 2017
Increases related to current year income tax positions
Increases related to prior year income tax positions
Decreases related to lapse of applicable statute of limitations
Balance at June 2, 2018
Increases related to current year income tax positions
Increases related to prior year income tax positions
Decreases related to prior year income tax positions
Decreases related to lapse of applicable statute of limitations
Decreases related to settlements
Balance at June 1, 2019
$
$
$
2.8
0.3
0.4
(0.3)
3.2
0.4
0.1
(0.4)
(0.3)
(1.1)
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)
Interest and penalty expense (income)
Liability for interest and penalties
June 1, 2019
June 2, 2018
June 3, 2017
$
$
(0.3)
0.7
$
$
$
0.1
1.0
0.2
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 2018 with the Internal Revenue Service under the Compliance Assurance
Process (CAP). For the majority of the remaining tax jurisdictions, the Company is no longer subject to state and local, or non-U.S. income tax
examinations by tax authorities for fiscal years before 2016.
Herman Miller, Inc. and Subsidiaries 71
12. Fair Value of Financial Instruments
The Company's financial instruments consist of cash equivalents, marketable securities, interest rate swaps, accounts and notes receivable,
deferred compensation plan, accounts payable, debt, redeemable noncontrolling interests and foreign currency exchange contracts. The
Company's financial instruments, other than long-term debt, are recorded at fair value. The fair value of fixed rate debt was based on third-party
quotes (Level 2). The carrying value and fair value of the Company's long-term debt, including current maturities, is as follows for the periods
indicated:
(In millions)
Carrying value
Fair value
June 1, 2019
June 2, 2018
$
$
285.0
287.8
$
$
285.8
288.6
The following describes the methods the Company uses to estimate the fair value of financial assets and liabilities, which have not significantly
changed in the current period:
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.
Equity securities — The Company's equity securities primarily include equity mutual funds. The equity mutual fund investments are recorded
at fair value using quoted prices for similar securities.
Available-for-sale securities — The Company's available-for-sale marketable securities primarily include fixed income mutual funds and
government obligations. These investments are recorded at fair value using quoted prices for similar securities.
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 current market-based activity. These forward contracts are not designated as hedging instruments.
Interest rate swap agreements — The Company's interest rate swap agreements value is determined using a market approach based on rates
obtained from active markets. The interest rate swap agreements are designated as a cash flow hedging instrument.
Deferred compensation plan assets — The Company's deferred compensation plan primarily includes various domestic and international mutual
funds that are recorded at fair value using quoted prices for similar securities.
Other — The Company's contingent consideration liabilities and redeemable noncontrolling interests are deemed to be level 3 fair value
measurements. Refer to Note 16 for further information regarding redeemable noncontrolling interests.
The following table sets forth financial assets and liabilities measured at fair value through net income and the respective pricing levels to which
the fair value measurements are classified within the fair value hierarchy as of June 1, 2019 and June 2, 2018:
Fair Value Measurements
June 1, 2019
Quoted Prices With
Other Observable Inputs
(Level 2)
NAV
Management
Estimates
(Level 3)
NAV
June 2, 2018
Quoted Prices With
Other Observable Inputs
(Level 2)
Management
Estimates
(Level 3)
(In millions)
Financial Assets
Cash equivalents:
Money market funds
Mutual funds - equity
Foreign currency forward contracts
Deferred compensation plan
Total
$ 69.5 $
—
—
—
$ 69.5 $
Financial Liabilities
Foreign currency forward contracts $
Contingent consideration
Total
$
— $
—
— $
72 2019 Annual Report
— $
0.9
—
12.5
13.4 $
1.4 $
—
1.4 $
— $ 121.0 $
—
—
—
— $ 121.0 $
—
—
—
— $
0.2
0.2
$
— $
—
— $
— $
0.9
0.4
15.1
16.4 $
0.3 $
—
0.3 $
—
—
—
—
—
—
0.5
0.5
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 June 1, 2019 and June 2, 2018.
(In millions)
June 1, 2019
June 2, 2018
Financial Assets
Mutual funds - fixed income
Interest rate swap agreement
Total
Financial Liabilities
Interest rate swap agreement
Total
Quoted Prices with
Other Observable
Inputs (Level 2)
$
$
$
$
7.9
1.0
8.9
2.2
2.2
$
$
Management
Estimate (Level 3)
$
— $
—
— $
Quoted Prices with
Other Observable
Inputs (Level 2)
Management
Estimate (Level 3)
—
$
—
—
$
7.7
15.0
22.7
—
— $
— $
— $
The table below presents a reconciliation for liabilities measured at fair value using significant unobservable inputs (Level 3):
(In millions)
Contingent Consideration
Beginning balance
Net realized (gains) losses
Settlements
Ending balance
June 1, 2019
June 2, 2018
$
$
0.5
(0.2)
(0.1)
0.2
$
$
—
—
0.5
0.1
(0.1)
0.5
The contingent consideration liabilities represent future payment obligations that relate to business and product line acquisitions. These payments
are based on the future performance of the acquired businesses. The contingent consideration liabilities are valued using estimates based on
discount rates that reflect the risk involved and the projected sales and earnings of the acquired businesses. The estimates are updated and
the liabilities are adjusted to fair value on a quarterly basis.
The following is a summary of the carrying and market values of the Company's fixed income mutual funds and equity mutual funds as of the
dates indicated:
(In millions)
Mutual funds - fixed income
Mutual funds - equity
Total
$
$
Cost
7.9
0.8
8.7 $
June 1, 2019
Unrealized
Gain/(Loss)
$
Market
Value
Cost
June 2, 2018
Unrealized
Gain/(Loss)
Market
Value
7.9
0.9
8.8
$
$
7.8 $
0.7
8.5 $
(0.1) $
0.2
0.1 $
7.7
0.9
8.6
— $
0.1
0.1 $
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, net".
The Company reviews its investment portfolio for any unrealized losses that would be deemed other-than-temporary and requires the recognition
of an impairment loss in earnings. If the cost of an investment exceeds its fair value, the Company evaluates, among other factors, general
market conditions, the duration and extent to which the fair value is less than its cost, the Company's intent to hold the investment, and whether
it is more likely than not that the Company will be required to sell the investment before recovery of the cost basis. The Company also considers
the type of security, related industry and sector performance, and published investment ratings. Once a decline in fair value is determined to be
other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is established. If conditions within individual
markets, industry segments, or macro-economic environments deteriorate, the Company could incur future impairments.
The Company views its equity and fixed income mutual funds as available for use in its current operations. Accordingly, the investments are
recorded within Current Assets within the Consolidated Balance Sheets.
On June 3, 2018, as a result of the adoption of ASU 2016-01 - Financial Instruments, the Company reclassified net gains on mutual fund equity
securities, that were formerly classified as available for sale securities before the adoption of the new standard, from Accumulated other
comprehensive loss to Retained earnings. The impact of adoption was $0.1 million which is not material to the Company's financial statements.
Herman Miller, Inc. and Subsidiaries 73
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 reporting period in the Consolidated Balance Sheets
with changes in fair value recorded within the Consolidated Statements of Comprehensive Income. The balance sheet classification for the fair
values of these forward contracts is to Other current assets for unrealized gains and to Other accrued liabilities for unrealized losses. The
Consolidated Statements of Comprehensive Income classification for the fair values of these forward contracts is to Other expenses (income):
Other, net, for both realized and unrealized gains and losses.
The notional amounts of the forward contracts held to purchase and sell U.S. dollars in exchange for other major international currencies were
$38.1 million and $37.3 million as of June 1, 2019 and June 2, 2018, respectively. The notional amounts of the foreign currency forward contracts
held to purchase and sell British pound sterling in exchange for other major international currencies were £19.2 million and £19.9 million as of
June 1, 2019 and June 2, 2018, respectively. The Company also has other forward contracts related to other currency pairs at varying notional
amounts.
Interest Rate Swaps
The Company enters into interest rate swap agreements to manage its exposure to interest rate changes and its overall cost of borrowing. The
Company's interest rate swap agreements were entered into to exchange variable rate interest payments for fixed rate payments over the life
of the agreement without the exchange of the underlying notional amounts. The notional amount of the interest rate swap agreements is used
to measure interest to be paid or received and does not represent the amount of exposure to credit loss. 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 remain an effective accounting hedge as of June 1, 2019. Since a
designated derivative meets hedge accounting criteria, the fair value of the hedge is recorded in the Consolidated Statement of Stockholders’
Equity as a component of Accumulated other comprehensive loss, net of tax. The ineffective portion of the change in fair value of the derivatives
is immediately recognized in earnings. The interest rate swap agreements are assessed for hedge effectiveness on a quarterly basis.
In September 2016, the Company entered into an interest rate swap agreement. The interest rate swap is for an aggregate notional amount of
$150.0 million with a forward start date of January 3, 2018 and a termination date of January 3, 2028. As a result of the transaction, the Company
effectively converted indebtedness anticipated to be borrowed on the Company’s revolving line of credit up to the notional amount from a LIBOR-
based floating interest rate plus applicable margin to a 1.949 percent fixed interest rate plus applicable margin under the agreement as of the
forward start date.
In June 2017, the Company entered into an interest rate swap agreement. The interest rate swap is for an aggregate notional amount of $75.0
million with a forward start date of January 3, 2018 and a termination date of January 3, 2028. As a result of the transaction, the Company
effectively converted the Company’s revolving line of credit up to the notional amount from a LIBOR-based floating interest rate plus applicable
margin to a 2.387 percent fixed interest rate plus applicable margin under the agreement as of the forward start date.
The fair value of the Company’s two outstanding interest rate swap agreements was a net liability of $1.2 million (comprised of a $1.0 million
asset position and a $2.2 million liability position) and an asset of $15.0 million as of June 1, 2019 and June 2, 2018, respectively. The liability
and asset fair value were recorded within Other Liabilities and Other Assets within the Consolidated Balance Sheets. Recorded within Other
comprehensive loss, net of tax, for the effective portion of the Company's designated cash flow hedges was a net unrealized loss of $12.8 million
and a net unrealized gain of $7.5 million for the fiscal years ended June 1, 2019 and June 2, 2018, respectively.
For fiscal 2019, 2018 and 2017, there were no gains or losses recognized against earnings for hedge ineffectiveness.
74 2019 Annual Report
Effects of Derivatives on the Financial Statements
The effects of derivatives on the consolidated financial statements were as follows for the fiscal years ended 2019 and 2018 (amounts presented
exclude any income tax effects):
(In millions)
Designated derivatives:
Interest rate swap
Interest rate swap
Non-designated derivatives:
Foreign currency forward contracts
Foreign currency forward contracts
Balance Sheet Location
June 1, 2019
June 2, 2018
Long-term assets: Other assets
Long-term liabilities: Other liabilities
Current assets: Other
Current liabilities: Other accrued liabilities
$
$
$
$
1.0
2.2
$
$
— $
$
1.4
15.0
—
0.4
0.3
(In millions)
Gain (loss) recognized on foreign currency forward
contracts
Statement of Comprehensive
Income Location
June 1, 2019
June 2, 2018
June 3, 2017
Fiscal Year
Other expenses (income): Other, net
$
0.3
$
0.4
$
(1.2)
The gain/(loss) recorded, net of income taxes, in Other comprehensive loss for the effective portion of designated derivatives was as follows
for the periods presented below:
(In millions)
Interest rate swap
June 1, 2019
$
(12.8) $
Fiscal Year
June 2, 2018
7.5
June 3, 2017
2.1
$
Losses reclassified from Accumulated other comprehensive loss into earnings were $0.5 million and $0.3 million for the fiscal years ended 2019
and 2018, respectively. There were no reclassifications required in fiscal 2017. The net of tax amount expected to be reclassified out of
Accumulated other comprehensive loss into earnings during the next twelve months is a $0.3 million gain.
Investments in Equity Securities Without a Readily Determinable Fair Value
In the fourth quarter of fiscal 2019, the Company recorded a gain from a $2.1 million fair value adjustment in an investment in a technology
partner, which increased the total carrying value of the investment to $3.6 million as of June 1, 2019. The gain was the result of an
observable price change for a similar investment in the same entity.
Herman Miller, Inc. and Subsidiaries 75
13. Warranties, Guarantees 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. Changes in the warranty reserve for the stated periods were as follows:
(In millions)
Accrual balance, beginning
Accrual for warranty matters
Settlements
Accrual balance, ending
Other Guarantees
2019
2018
2017
$
$
51.5 $
20.7
(19.1)
53.1 $
47.7
22.1
(18.3)
51.5
$
$
43.9
22.8
(19.0)
47.7
The Company is periodically required to provide performance bonds in order to conduct business with certain customers. These arrangements
are common and generally have terms ranging between one and three years. The bonds are required to provide assurances to customers that
the products and services they have purchased will be installed and/or provided properly and without damage to their facilities. The performance
bonds are provided by various bonding agencies and the Company is ultimately liable for claims that may occur against them. As of June 1,
2019, the Company had a maximum financial exposure related to performance bonds of approximately $5.7 million. 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 significantly affect the Company's Consolidated Financial
Statements. Accordingly, no liability has been recorded as of June 1, 2019 and June 2, 2018.
The Company periodically enters into agreements in the normal course of business that may include indemnification clauses regarding service
losses. Service losses represent all direct or consequential loss, liability, damages, costs and expenses incurred by the customer or others
resulting from services rendered by the Company, the dealer, or certain sub-contractors, due to a proven negligent act. The Company has no
history of claims, nor is it aware of circumstances that would require it to perform under these arrangements and believes that the resolution of
any claims that might arise in the future, either individually or in the aggregate, would not significantly affect the Company's Consolidated Financial
Statements. Accordingly, no liability has been recorded as of June 1, 2019 and June 2, 2018.
The Company has entered into standby letter of credit arrangements for the purpose of protecting various insurance companies and lessors
against default on insurance premium and lease payments. As of June 1, 2019, the Company had a $10 million financial exposure from these
standby letters 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 significantly affect the Company's Consolidated Financial Statements. Accordingly, no liability has been recorded as of June 1, 2019 and
June 2, 2018.
Contingencies
The Company is also involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the
outcome of such proceedings and litigation currently pending will not materially affect the Company's Consolidated Financial Statements.
The Company is a party to options, that if exercised, would require the Company to purchase an additional 33% of the equity in HAY at fair
market value. These options may be exercised during a period commencing from the third quarter of fiscal 2020.
As of the end of fiscal 2019, outstanding commitments for future purchase obligations approximated $73.5 million.
76 2019 Annual Report
14. Operating Segments
In fiscal 2018, the Company's reportable segments consisted of North American Furniture Solutions, ELA ("EMEA, Latin America, and Asia
Pacific") Furniture Solutions, Specialty and Consumer. Effective in the fourth quarter of fiscal 2019, the Company has revised its reportable
segments to combine the Specialty reportable segment with the North American Furniture Solutions reportable segment. The newly combined
segment is called "North America Contract". There were no changes to the Company's ELA Furniture Solutions ("ELA") and Consumer segments,
but each has been renamed. Effective in the fourth quarter of fiscal 2019, ELA is now named "International Contract" and Consumer is named
"Retail". The Specialty segment (Maharam, Geiger, Nemschoff and the Herman Miller Collection) has been combined with the North America
Contract segment under a common segment manager as of the fourth quarter fiscal 2019. The change in operating segments reflect the basis
of how the Company internally reports and evaluates financial information used to make operating decisions. Prior year results disclosed in the
table below have been revised to reflect these changes.
The North America Contract segment includes the operations associated with the design, manufacture, and sale of furniture and textile products
for work-related settings, including office, education, and healthcare environments, throughout the United States and Canada. The business
associated with the Company's owned contract furniture dealers is also included in the North America Contract segment. In addition to the
Herman Miller brand, this segment includes the operations associated with the design, manufacture and sale of high-craft furniture products
and textiles including Geiger wood products, Maharam textiles, Nemschoff and Herman Miller Collection products. The International Contract
segment includes EMEA, Latin America, and Asia-Pacific. International Contract includes the operations associated with the design, manufacture,
and sale of furniture products, primarily for work-related settings, in these aforementioned geographic regions. The Retail segment includes
operations associated with the sale of modern design furnishings and accessories to third party retail distributors, as well as direct to consumer
sales through eCommerce, direct mailing catalogs and Design Within Reach and HAY studios.
The Company also reports a “Corporate” category consisting primarily of unallocated expenses related to general corporate functions, including,
but not limited to, certain legal, executive, corporate finance, information technology, administrative and acquisition-related costs. Management
regularly reviews corporate costs and believes disclosing such information provides more visibility and transparency regarding how the chief
operating decision maker reviews results of the Company. The accounting policies of the reportable operating segments are the same as those
of the Company.
Herman Miller, Inc. and Subsidiaries 77
The performance of the operating segments is evaluated by the Company's management using various financial measures. The following is a
summary of certain key financial measures for the respective fiscal years indicated:
(In millions)
Net Sales:
North America Contract
International Contract
Retail
Corporate
Total
Depreciation and Amortization:
North America Contract
International Contract
Retail
Corporate
Total
Operating Earnings (Losses):
North America Contract
International Contract
Retail
Corporate
Total
Capital Expenditures:
North America Contract
International Contract
Retail
Corporate
Total
Total Assets:
North America Contract
International Contract
Retail
Corporate
Total
Goodwill:
North America Contract
International Contract
Retail
Corporate
Total
2019
2018
2017
$
1,686.5
$
1,589.8
$
492.2
388.5
—
434.5
356.9
—
2,567.2
$
2,381.2
$
$
$
$
$
$
46.8
10.5
14.1
0.7
72.1
189.7
57.8
5.3
(49.3)
203.5
52.7
16.6
16.5
—
$
$
$
$
$
43.9
10.2
12.1
0.7
66.9
175.2
36.9
13.9
(47.1)
178.9
46.0
11.4
13.2
—
85.8
$
70.6
$
1,574.6
385.5
318.1
—
2,278.2
37.7
9.4
10.2
1.6
58.9
184.1
36.2
4.8
(34.0)
191.1
56.8
8.5
22.0
—
87.3
$
733.6
356.8
310.0
168.9
$
677.4
283.4
291.2
227.5
1,569.3
$
1,479.5
$
691.5
230.3
276.4
108.1
1,306.3
185.3
39.7
78.8
—
303.8
$
$
185.3
40.0
78.8
—
304.1
$
$
185.6
40.1
78.8
—
304.5
$
$
$
$
$
$
$
$
$
$
$
The accounting policies of the reportable operating segments are the same as those of the Company. Additionally, the Company employs a
methodology for allocating corporate costs and assets with the underlying objective of this methodology being to allocate corporate costs
according to the relative usage of the underlying resources and to allocate corporate assets according to the relative expected benefit. The
majority of the allocations for corporate expenses are based on relative net sales. However, certain corporate costs, generally considered the
result of isolated business decisions, are not subject to allocation and are evaluated separately from the rest of the regular ongoing business
operations.
78 2019 Annual Report
The Company's product offerings consist primarily of office furniture systems, seating, freestanding furniture, storage and casegoods. These
product offerings are marketed, distributed and managed primarily as a group of similar products on an overall portfolio basis. The following is
a summary of net sales estimated by product category for the respective fiscal years indicated:
(In millions)
Net Sales:
Systems
Seating
Freestanding and storage
Textiles
Other (1)
Total
2019
2018
2017
$
$
668.0
1,013.5
505.4
113.8
266.5
$
601.5
965.9
465.1
94.3
254.4
$
2,567.2
$
2,381.2
$
639.0
894.8
428.8
96.9
218.7
2,278.2
(1) “Other” primarily consists of uncategorized product sales and service sales.
Sales by geographic area are based on the location of the customer. Long-lived assets consist of long-term assets of the Company, excluding
financial instruments, deferred tax assets and long-term intangibles. The following is a summary of geographic information for the respective
fiscal years indicated. Individual foreign country information is not provided as none of the individual foreign countries in which the Company
operates are considered material for separate disclosure based on quantitative and qualitative considerations.
(In millions)
Net Sales:
United States
International
Total
Long-lived assets:
United States
International
Total
2019
2018
2017
1,865.8
$
1,737.9
$
701.4
643.3
2,567.2
$
2,381.2
$
1,690.1
588.1
2,278.2
422.1
52.2
474.3
$
$
349.3
50.5
399.8
$
$
328.6
45.3
373.9
$
$
$
$
The Company estimates that no single dealer accounted for more than 5 percent of the Company's net sales in the fiscal year ended June 1,
2019. The Company estimates that its largest single end-user customer accounted for $129.6 million, $109.8 million and $102.3 million of the
Company's net sales in fiscal 2019, 2018 and 2017, respectively. This represents approximately 5 percent, 5 percent and 5 percent of the
Company's net sales in fiscal 2019, 2018 and 2017, respectively.
Approximately 5 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.
Herman Miller, Inc. and Subsidiaries 79
15. Accumulated Other Comprehensive Loss
The following table provides an analysis of the changes in accumulated other comprehensive loss for the years ended June 1, 2019, June 2,
2018 and June 3, 2017:
(In millions)
Cumulative translation adjustments at beginning of period
Other comprehensive (loss) income before reclassifications
Balance at end of period
Pension and other post-retirement benefit plans at beginning of period
Other comprehensive (loss) income before reclassifications (net of tax of $2.0, ($2.9),
and $3.7)
Reclassification from accumulated other comprehensive income - Other, net
Tax (expense) benefit
Net reclassifications
Net current period other comprehensive (loss) income
Balance at end of period
Interest rate swap agreement at beginning of period
Cumulative effect of accounting change
Other comprehensive (loss) income before reclassifications (net of tax of $5.3, ($4.0),
and ($1.2))
Reclassification from accumulated other comprehensive income - Other, net
Net reclassifications
Net current period other comprehensive (loss) income
Balance at end of period
Unrealized Gains on Available-for-sale Securities at beginning of period
Cumulative effect of accounting change
Other comprehensive income before reclassifications
Balance at end of period
Year Ended
June 2, 2018
June 1, 2019
$
(34.1) $
(14.2)
(48.3)
June 3, 2017
(29.6)
(7.2)
(36.8)
(36.8) $
2.7
(34.1)
(37.2)
(10.0)
2.6
(0.4)
2.2
(7.8)
(45.0)
9.9
1.5
(12.8)
0.5
0.5
(12.3)
(0.9)
0.1
(0.1)
—
—
(47.6)
5.3
4.2
0.9
5.1
10.4
(37.2)
2.1
—
7.5
0.3
0.3
7.8
9.9
0.1
—
—
0.1
(34.9)
(14.5)
2.2
(0.4)
1.8
(12.7)
(47.6)
—
—
2.1
—
—
2.1
2.1
—
—
0.1
0.1
Total Accumulated other comprehensive loss
$
(94.2) $
(61.3) $
(82.2)
80 2019 Annual Report
16. Redeemable Noncontrolling Interests
Redeemable noncontrolling interests are reported on the Consolidated Balance Sheets in mezzanine equity within the caption Redeemable
noncontrolling interests. The Company recognizes changes to the redemption value of redeemable noncontrolling interests as they occur and
adjusts the carrying value to equal the redemption value at the end of each reporting period subject to a “floor” amount that is equal to the fair
value of the redeemable noncontrolling interests at the time they were originally recorded. The redemption amounts have been estimated based
on the fair value of the subsidiary, determined based on a weighting of the discounted cash flow and market methods. This represents a level
3 fair value measurement.
Changes in the Company’s Redeemable noncontrolling interests for the years ended June 1, 2019 and June 2, 2018 are as follows:
(In millions)
Balance at beginning of period
Purchase of redeemable noncontrolling interests
Net income attributable to redeemable noncontrolling interests
Exercised options
Redemption value adjustment
Other adjustments
Balance at end of period
Year Ended
June 1, 2019
June 2, 2018
$
$
30.5
(10.1)
—
0.2
—
—
20.6
$
$
24.6
(1.0)
0.6
0.1
6.2
—
30.5
The Company is the controlling owner of a subsidiary in which there are redeemable noncontrolling equity interests outstanding. Certain minority
shareholders in this subsidiary have the right, at certain times, to require the subsidiary to acquire a portion of their ownership interest in those
entities at fair value. During fiscal 2019, these minority shareholders exercised certain of these options to require the Company's subsidiary to
purchase $10.1 million of the outstanding redeemable noncontrolling interests. By comparison, options exercised by the minority shareholders
in fiscal 2018 resulted in purchases totaling $1.0 million. The subsidiary also has an option to acquire a portion of the redeemable noncontrolling
interests at fair market value. On July 23, 2019, the subsidiary exercised an option that allowed it to acquire approximately $12.6 million of the
remaining $20.6 million of the redeemable noncontrolling equity interests.
17. Restructuring and Impairment Activities
North America Contract segment
2019 Restructuring Expense
During the fourth quarter of fiscal 2019, the Company announced restructuring activities associated with our profit improvement initiatives,
including costs associated with an early retirement program. The Company also engaged in the consolidation of facilities related to its Nemschoff
business. These actions resulted in pre-tax restructuring expenses totaling $7.7 million relating to employee severance related actions of $6.7
million and lease termination and disposal activities of $1.0 million in the fourth quarter. Future estimated restructuring expenses relate to the
early retirement program and are estimated at a cost of $1.8 million. The project is expected to generate cost savings of approximately $10
million and is expected to conclude in the second quarter of fiscal 2020.
The table below shows provides an analysis of the North America Contract Segment restructuring cost reserve for the year ended June 1,
2019:
(In millions)
Beginning Balance
Restructuring Costs
Ending Balance
June 1, 2019
Severance and
Employee-Related
Exit or Disposal
Activities
Total
$
$
— $
6.7
6.7 $
— $
1.0 $
1.0 $
—
7.7
7.7
Herman Miller, Inc. and Subsidiaries 81
2018 Restructuring Expense
During the first quarter of fiscal 2018, the Company announced restructuring actions involving targeted workforce reductions primarily within
the North America Contract segment. These actions related to the Company's cost savings initiatives and resulted in the recognition of restructuring
expenses of $1.4 million in the first quarter of fiscal 2018. The restructuring actions were completed, and final payments made in fiscal 2018.
During the second quarter of fiscal 2018, the Company announced further restructuring actions involving targeted workforce reductions primarily
within the North America Contract segment. These actions related to the Company's previously announced cost savings initiatives and resulted
in the recognition of restructuring expenses of $0.4 million in the second quarter of fiscal 2018. The restructuring actions were completed, and
final payments made in fiscal 2018.
International Contract segment
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. It is currently contemplated that this plan will generate
approximately $3 million in annual cost reductions as part of the Company's three-year cost savings initiatives.
During fiscal 2018 the Company recognized restructuring expenses of $3.9 million of which $2.4 million related to workforce reductions and
$1.5 million related to the exit and disposal activities as a result of consolidating the United Kingdom office and China manufacturing facilities.
In the fourth quarter of fiscal 2019, the Company recognized restructuring expenses of $0.8 million related to the consolidation of the facilities
mentioned above. In fiscal 2019, the Company recognized restructuring and impairment expenses of $2.5 million related to the facilities
consolidation plan, comprised primarily of $0.8 million related to an asset impairment recorded against the office building in the United Kingdom
that is being vacated and $1.4 million from the consolidation of the Company's manufacturing facilities in China. As the United Kingdom office
building and related assets meet the criteria to be designated as assets held for sale, the carrying value of these assets have been classified
as current assets and included within "Other" in the Consolidated Balance Sheets for the period ended June 1, 2019. The carrying amount of
the assets held for sale was approximately $4.2 million as of June 1, 2019.
The Company expects the International Contract facilities consolidations to be completed by the first quarter of fiscal 2020. It is currently
contemplated that this plan will incur an additional estimated $2 million of future restructuring and related special charges.
The following table provides an analysis of the changes in the International Contract segment restructuring costs reserve for the fiscal year
ended June 2, 2018 and the fiscal year ended June 1, 2019 :
(In millions)
June 3, 2017
Restructuring Costs
Amounts Paid
June 2, 2018
Restructuring Costs
Amounts Paid
Charges Against Assets
June 1, 2019
18. Variable Interest Entities
Severance and
Employee-Related
Impairment of Property
and Equipment
Exit or Disposal
Activities
Total
$
$
$
— $
2.4
(2.4)
— $
0.3
(0.2)
—
0.1 $
— $
—
—
— $
0.8
—
(0.8)
— $
— $
1.5 $
(1.5) $
— $
1.4 $
(1.3) $
— $
0.1 $
—
3.9
(3.9)
—
2.5
(1.5)
(0.8)
0.2
The Company has long-term notes receivable with certain of its third-party owned dealers that are deemed to be variable interests in variable
interest entities. The carrying value of these long-term notes receivable was $1.6 million and $2.5 million as of June 1, 2019 and June 2, 2018,
respectively, and represents the Company’s maximum exposure to loss. The Company is not deemed to be the primary beneficiary for any of
these variable interest entities as each entity controls the activities that most significantly impact the entity’s economic performance, including
sales, marketing, and operations.
82 2019 Annual Report
19. Quarterly Financial Data (Unaudited)
Set forth below is a summary of the quarterly operating results on a consolidated basis for the years ended June 1, 2019, June 2, 2018, and
June 3, 2017.
(In millions, except per share data)
2019 Net sales
Gross margin
Net earnings attributable to Herman Miller, Inc.
Earnings per share-basic
Earnings per share-diluted
2018 Net Sales
Gross margin
Net earnings attributable to Herman Miller, Inc.
Earnings per share-basic
Earnings per share-diluted
2017 Net sales
Gross margin
Net earnings attributable to Herman Miller, Inc.
Earnings per share-basic
Earnings per share-diluted
$
$
$
First
Quarter (1)
Second
Quarter (1)
Third
Quarter (1)
Fourth
Quarter (1)
$
$
$
624.6
225.1
35.8
0.60
0.60
580.3
216.9
33.1
0.55
0.55
598.6
230.0
36.3
0.61
0.60
$
$
$
652.6
235.6
39.3
0.66
0.66
604.6
222.1
33.5
0.56
0.55
577.5
218.0
31.7
0.53
0.53
$
$
$
619.0
221.0
39.2
0.67
0.66
578.4
205.8
29.8
0.50
0.49
524.9
195.5
22.5
0.38
0.37
671.0
248.2
46.2
0.78
0.78
618.0
228.3
31.8
0.53
0.53
577.2
220.9
33.4
0.56
0.55
(1) For some line items, the sum of the quarters does not equal the annual balance reflected in the Consolidated Statements of Comprehensive
Income due to rounding associated with the calculations on an individual quarter basis.
Herman Miller, Inc. and Subsidiaries 83
Management's Report on Internal Control over Financial Reporting
To the Board of Directors and Stockholders of Herman Miller, Inc.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act
Rules 13a-15(f). The internal control over financial reporting at Herman Miller, Inc., is designed to provide reasonable assurance to our
stakeholders that the financial statements of the Company fairly represent its financial condition and results of operations.
Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not
prevent or detect all misstatements. Further, because of changes in conditions, effectiveness of internal control over financial reporting may
vary over time.
Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we conducted
an assessment of the effectiveness of our internal control over financial reporting as of June 1, 2019, based on the original framework in Internal
Control — Integrated Framework (2013 Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based
on this assessment, our management believes the Company's internal control over financial reporting was effective as of June 1, 2019.
Ernst & Young 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
84 2019 Annual Report
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Herman Miller, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Herman Miller, Inc. and subsidiaries’ internal control over financial reporting as of June 1, 2019, based on criteria established
in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework)
(the COSO criteria). In our opinion, Herman Miller, Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal
control over financial reporting as of June 1, 2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
consolidated balance sheets of Herman Miller, Inc. and subsidiaries as of June 1, 2019 and June 2, 2018, and the related consolidated statements
of comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended June 1, 2019, and the related
notes and financial statement schedule listed in the Index at Item 15(a) of the Company and our report dated July 30, 2019 expressed an
unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible 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 internal control over financial reporting based on our audit. 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists,
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures
as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
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.
/s/ Ernst & Young LLP
Grand Rapids, Michigan
July 30, 2019
Herman Miller, Inc. and Subsidiaries 85
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 sheets of Herman Miller, Inc. and subsidiaries (the Company) as of June 1, 2019 and
June 2, 2018, and the related consolidated statements of comprehensive income, stockholders’ equity and cash flows for each of the three
years in the period ended June 1, 2019, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively
referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects,
the financial position of the Company at June 1, 2019 and June 2, 2018, and the results of its operations and its cash flows for each of the three
years in the period ended June 1, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
Company’s internal control over financial reporting as of June 1, 2019, based on criteria established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated July 30, 2019
expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s
financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits
included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis
for our opinion.
/s/ Ernst & Young LLP
We have served as the Company's auditor since 2002
Grand Rapids, Michigan
July 30, 2019
86 2019 Annual Report
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None
Herman Miller, Inc. and Subsidiaries 87
Item 9A Controls and Procedures
(a)
(b)
(c)
Disclosure Controls and Procedures. Under the supervision and with the participation of management, the Company's Chief Executive
Officer and Chief Financial Officer have evaluated the effectiveness of the Company's disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 1, 2019 and have concluded that as of that date, the Company's disclosure
controls and procedures were effective.
Management's Annual Report on Internal Control Over Financial Reporting and Attestation Report of the Independent Registered
Public Accounting Firm. Refer to Item 8 for “Management's Report on Internal Control Over Financial Reporting.” The effectiveness
of the Company's internal control over financial reporting has been audited by Ernst and Young LLP, an independent registered
accounting firm, as stated in its report included in Item 8.
Changes in Internal Control Over Financial Reporting. There were no changes in the Company's internal control over financial
reporting during the fourth quarter ended June 1, 2019, that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
88 2019 Annual Report
Item 9B Other Information
None
Herman Miller, Inc. and Subsidiaries 89
Item 10 Directors, Executive Officers and Corporate Governance
Directors, Executive Officers, Promoters and Control Persons
PART III
Information relating to directors and director nominees of the Company is contained under the caption “Director and Executive Officer Information”
in the Company's definitive Proxy Statement, relating to the Company's 2019 Annual Meeting of Stockholders, and the information within that
section is incorporated by reference. Information relating to Executive Officers of the Company is included in Part I hereof entitled “Executive
Officers of the Registrant.”
Compliance with Section 16(a) of the Exchange Act
Information relating to compliance with Section 16(a) of the Exchange Act is contained under the caption “Section 16(a) Beneficial Ownership
Reporting Compliance” in the Company's definitive Proxy Statement, relating to the Company's 2019 Annual Meeting of Stockholders, and the
information within that section is incorporated by reference.
Code of Ethics
The Company has adopted a Code of Conduct that serves as the code of ethics for the executive officers and senior financial officers and as
the code of business conduct for all Company directors and employees. This code is made available free of charge through the “Investors”
section of the Company's internet website at www.hermanmiller.com. Any amendments to, or waivers from, a provision of this code also will be
posted to the Company's internet website.
Corporate Governance
Information relating to the identification of the audit committee, audit committee financial experts, and director nomination procedures of the
Company is contained under the captions “Board Committees” and “Corporate Governance and Board Matters — Director Nominations” in the
Company's definitive Proxy Statement, relating to the Company's 2019 Annual Meeting of Stockholders, and the information within these sections
is incorporated by reference.
90 2019 Annual Report
Item 11 Executive Compensation
Information relating to executive compensation is contained under the captions “Compensation Discussion and Analysis,” “Summary
Compensation Table,” “Grants of Plan-Based Awards,” “Outstanding Equity Awards at Fiscal Year-End,” “Option Exercises and Stock Vested,”
“Pension Benefits,” “Nonqualified Deferred Compensation,” “Potential Payments Upon Termination, Death, Disability, Retirement or Change in
Control,” “Director Compensation,” “Director Compensation Table,” and “Compensation Committee Interlocks and Insider Participation” in the
Company's definitive Proxy Statement, relating to the Company's 2019 Annual Meeting of Stockholders, and the information within these sections
is incorporated by reference. The information under the caption “Compensation Committee Report” is incorporated by reference, however, such
information is not deemed filed with the Commission.
Herman Miller, Inc. and Subsidiaries 91
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The sections entitled “Voting Securities and Principal Stockholders,” “Director and Executive Officer Information,” and “Equity Compensation
Plan Information” in the Company's definitive Proxy Statement, relating to the Company's 2019 Annual Meeting of Stockholders, and the
information within these sections is incorporated by reference.
92 2019 Annual Report
Item 13 Certain Relationships and Related Transactions, and Director Independence
Information concerning certain relationships and related transactions contained under the captions “Related Party Transactions,” and “Corporate
Governance and Board Matters — Determination of Independence of Board Members” in the Company's definitive Proxy Statement, relating
to the Company's 2019 Annual Meeting of Stockholders and the information within these sections is incorporated by reference.
Herman Miller, Inc. and Subsidiaries 93
Item 14 Principal Accountant Fees and Services
Information relating to the ratification of the selection of the Company's independent public accountants and concerning the payments to our
principal accountants and the services provided by our principal accounting firm set forth under the captions "Ratification of the Audit Committee's
selection of Independent Registered Accounting Firm" and “Disclosure of Fees Paid to Independent Auditors” in the Company's definitive Proxy
Statement, relating to the Company's 2019 Annual Meeting of Stockholders, and the information within that section is incorporated by reference.
94 2019 Annual Report
PART IV
Item 15 Exhibits and Financial Statement Schedule
(a)
The following documents are filed as a part of this report:
1.
Financial Statements
The following Consolidated Financial Statements of the Company are included in this Annual Report on Form 10-K on the pages
noted:
Consolidated Statements of Comprehensive Income
Consolidated Balance Sheets
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
Management's Report on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm on Financial Statements
2.
Financial Statement Schedule
The following financial statement schedule is included in this Annual Report on Form 10-K on the pages noted:
Schedule II-
Valuation and Qualifying Accounts and Reserves for the Years Ended June 1, 2019,
June 2, 2018 and and June 3, 2017
Page Number in
this Form 10-K
39
40
41
42
43
84
85
86
Page Number in
this Form 10-K
101
All other schedules required by Form 10-K Annual Report have been omitted because they were not applicable, included in the Notes
to the Consolidated Financial Statements, or otherwise not required under instructions contained in Regulation S-X.
3.
Exhibits
Reference is made to the Exhibit Index which is included on pages 97-99.
Herman Miller, Inc. and Subsidiaries 95
Item 16 Form 10-K Summary
None
Herman Miller, Inc. and Subsidiaries 96
(3)
Articles of Incorporation and Bylaws
EXHIBIT INDEX
(a)
(b)
Restated Articles of Incorporation, dated October 8, 2018, is incorporated by reference to Exhibit 3.1 of Registrant's
Form 8-K Report dated October 8, 2018 (Commission File No. 001-15141).
Amended and Restated Bylaws, dated April 9, 2019, is incorporated by reference to Exhibit 3 of the Registrant's Form
8-K Report dated April 9, 2019 (Commission File No. 001-15141).
(4)
Instruments Defining the Rights of Security Holders
(a)
(b)
(c)
(d)
Specimen copy of Herman Miller, Inc., common stock is incorporated by reference to Exhibit 4(a) of Registrant's 1981
Form 10-K Annual Report (Commission File No. 001-15141).
Other instruments which define the rights of holders of long-term debt individually represent debt of less than 10% of
total assets. In accordance with item 601(b)(4)(iii)(A) of regulation S-K, the Registrant agrees to furnish to the Commission
copies of such agreements upon request.
Dividend Reinvestment Plan for Shareholders of Herman Miller, Inc., dated January 6, 1997, is incorporated by reference
to Exhibit 4(d) of the Registrant's 1997 Form 10-K Annual Report (Commission File No. 000-05813).
Third Amended and Restated Credit agreement dated as of July 21, 2014 among Herman Miller, Inc. and various lenders
is incorporated by reference to Exhibit 10.1 of the Registrant's Report on Form 8-K dated July 22, 2014 (Commission
File No. 001-15141).
(10)
Material Contracts
(a)
Herman Miller, Inc. 2011 Long-Term Incentive Plan, as amended by Sixth Amendment (2019).(1)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
Herman Miller, Inc. Nonemployee Officer and Director Deferred Compensation Plan is incorporated by reference to
Exhibit 10(b) of the Registrant's Form 10-K Report dated July 26, 2016 (Commission File No. 001-15141).(1)
Form of Change in Control Agreement of the Registrant is incorporated by reference to Exhibit 10(c) of Registrant's Form
10-K Report dated August 1, 2017 (Commission File No. 001-15141).(1)
Herman Miller, Inc. Executive Equalization Retirement Plan is incorporated by reference to Exhibit 10 (d) of the Registrant's
Form 10-K Report dated July 28, 2015 (Commission File No. 001-15141).(1)
Form of Herman Miller, Inc., Long-Term Incentive Plan Stock Option Agreement is incorporated by reference to Exhibit
10.1 of the Registrant's Form 10-Q Report dated January 9, 2019 (Commission File No. 001-15141).(1)
Form of Herman Miller, Inc., Long-Term Incentive Restricted Stock Unit Award is incorporated by reference to Exhibit
10.2 of the Registrant's Form 10-Q Report dated January 9, 2019 (Commission File No. 001-15141).(1)
Form of Herman Miller, Inc. 2011 Long-Term Incentive HMVA Plan Performance Share Unit Award is incorporated by
reference to Exhibit 10.3 of the Registrant's Form 10-Q Report dated January 9, 2019 (Commission File No. 001-15141).
(1)
Form of Herman Miller, Inc. 2011 Long-Term Incentive Plan TSR Performance Share Unit Award Agreement is
incorporated by reference to Exhibit 10.4 of the Registrant's Form 10-Q Report dated January 9, 2019 (Commission File
No. 001-15141).(1)
Herman Miller, Inc. and Subsidiaries 97
(i)
(j)
(k)
(l)
Form of Herman Miller, Inc. 2011 Long-Term Incentive Plan Conditional Stock Option Award is incorporated by reference
to Exhibit 10(p) of the Registrant's 10-K Report dated July 28, 2015 (Commission File No. 001-15141).(1)
Trust Under the Herman Miller, Inc. Nonemployee Officer and Director Compensation Plan is incorporated by reference
to Exhibit 10(q) of the Registrant's Form 10-K Report dated July 26, 2016 (Commission File No. 001-15141).(1)
Retirement Agreement dated February 5, 2018 between Herman Miller, Inc. and Brian C. Walker, Chief Executive Officer,
is incorporated by reference to Exhibit 10.1 of the Registrant's Form 10-Q Report dated April 11, 2018 (Commission File
No. 001-15141).(1)
Covenant Agreement dated February 5, 2018 between Herman Miller, Inc. and Brian C. Walker, Chief Executive Officer,
is incorporated by reference to Exhibit 10.2 of the Registrant's Form 10-Q Report dated April 11, 2018 (Commission File
No. 001-15141).(1)
(m)
Form of Retention Agreement between Herman Miller, Inc. and Jeffrey M. Stutz, Gregory J. Bylsma, Andrew J. Lock,
and B. Ben Watson is incorporated by reference to Exhibit 10.1 of the Registrant's Form 8-K Report dated February 5,
2018 (Commission File No. 001-15141).(1)
(n)
(o)
(p)
(q)
(r)
(s)
The Share Purchase agreement dated June 7, 2018 between Herman Miller Holdings Limited, Nine United A/S and
Holdingselskabet af 1/7 2007 ApS is incorporated by reference to Exhibit 10(v) of Registrant's Form 10-K Report dated
July 31, 2018 (Commission File No. 001-15141).(1)
Employment Agreement between Herman Miller, Inc. and Andrea R. Owen, Chief Executive Officer, dated August 3,
2018, is incorporated by reference to Exhibit 10.1 of the Registrant’s Form 10-Q Report dated October 10, 2018
(Commission File No. 001-15141).(1)
Stock Option Agreement between Herman Miller, Inc. and Andrea Owen is incorporated by reference to Exhibit [10.5]
of the Registrant's Form 10-Q Report dated January 9, 2019 (Commission File No. 001-15141). (1)
Restricted Stock Unit Award Agreement between Herman Miller, Inc. and Andrea Owen is incorporated by reference to
Exhibit 10.6 of the Registrant's Form 10-Q Report dated January 9, 2019 (Commission File No. 001-15141).(1)
HMVA Performance Share Award Agreement between Herman Miller, Inc. and Andrea Owen is incorporated by reference
to Exhibit 10.7 of the Registrant's Form 10-Q Report dated January 9, 2019 (Commission File No. 001-15141).(1)
TSR Performance Share Unit Award Agreement between Herman Miller, Inc. and Andrea Owen is incorporated by
reference to Exhibit 10.8 of the Registrant's Form 10-Q Report dated January 9, 2019 (Commission File No. 001-15141).
(1)
(t)
Herman Miller, Inc. 2019 Executive Incentive Cash Bonus Plan dated July 15, 2019 is incorporated by reference to
Exhibit 10 of the Registrant's Form 8-K filed July 19, 2019 (Commission File No. 001-15141).(1)
(21)
Subsidiaries
(23)(a)
Consent of Independent Registered Public Accounting Firm
(24)
Power of Attorney (included on the signature page to this Registration Statement)
(31)(a)
Certificate of the Chief Executive Officer of Herman Miller, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(31)(b)
Certificate of the Chief Financial Officer of Herman Miller, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(32)(a)
Certificate of the Chief Executive Officer of Herman Miller, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(32)(b)
Certificate of the Chief Financial Officer of Herman Miller, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
98 2019 Annual Report
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
(1) Denotes compensatory plan or arrangement.
Herman Miller, Inc. and Subsidiaries 99
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
HERMAN MILLER, INC.
By
/s/ Jeffrey M. Stutz
Jeffrey M. Stutz
Chief Financial Officer (Principal Accounting
Officer and Duly Authorized Signatory for
Registrant)
Date:
July 30, 2019
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on, July 30, 2019 by the following persons
on behalf of the Registrant in the capacities indicated.
/s/ Lisa Kro
Lisa Kro
(Director)
/s/ Mary Vermeer Andringa
Mary Vermeer Andringa
(Director)
/s/ John R. Hoke III
John R. Hoke III
(Director)
/s/ J. Barry Griswell
J. Barry Griswell
(Director)
/s/ Andrea R. Owen
Andrea R. Owen
(President, Chief Executive Officer, and Director)
/s/ Jeffrey M. Stutz
Jeffrey M. Stutz
(Chief Financial Officer and Principal Accounting Officer)
/s/ Michael A. Volkema
Michael A. Volkema
(Chairman of the Board)
/s/ David A. Brandon
David A. Brandon
(Director)
/s/ Douglas D. French
Douglas D. French
(Director)
/s/ Heidi Manheimer
Heidi Manheimer
(Director)
/s/ Mike Smith
Mike Smith
(Director)
100 2019 Annual Report
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
(In millions)
Column A
Description
Year ended June 1, 2019:
Accounts receivable allowances — uncollectible accounts(1)
Accounts receivable allowances — credit memo(2)
Allowance for possible losses on notes receivable
Valuation allowance for deferred tax asset
Year ended June 2, 2018:
Accounts receivable allowances — uncollectible accounts(1)
Accounts receivable allowances — credit memo(2)
Allowance for possible losses on notes receivable
Valuation allowance for deferred tax asset
Year ended June 3, 2017:
Accounts receivable allowances — uncollectible accounts(1)
Accounts receivable allowances — credit memo (2)
Allowance for possible losses on notes receivable
$
$
$
$
$
$
$
$
$
$
$
Column B
Balance at
beginning of
period
Column C
Charges to
expenses or
net sales
Column D
Column E
Deductions (3)
Balance at
end of period
2.4 $
0.5 $
0.4 $
10.3 $
2.3 $
0.4 $
0.9 $
10.0 $
3.4 $
0.4 $
0.9 $
0.6
$
— $
(0.1)
0.4
0.6
0.1
(0.5)
0.5
$
$
$
$
$
$
— $
— $
— $
(0.1)
0.1
$
$
— $
(0.3)
(0.5)
$
$
— $
— $
(0.2)
(1.1)
$
$
— $
— $
2.9
0.6
0.3
10.4
2.4
0.5
0.4
10.3
2.3
0.4
0.9
10.0
Valuation allowance for deferred tax asset
— $
(1) Activity under the “Charges to expense or net sales” column are recorded within selling, general and administrative expenses.
(2) Activity under the “Charges to expenses or net sales” column are recorded within net sales.
(3) Represents amounts written off, net of recoveries and other adjustments. Includes effects of foreign translation.
10.6 $
(0.6)
$
$
Herman Miller, Inc. and Subsidiaries 101
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® Herman Miller,
subsidiaries
, Design Within Reach, Geiger, Maharam and Nemschoff are among the trademarks of Herman Miller, Inc., and its
All other trademarks are the property of their respective owners
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