10-K 1 hmi10k_06012019.htm 10-K Document


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
 
       38-0837640        
 
 
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
 
 
 
 
855 East Main Avenue
 
 
 
 
PO Box 302
 
 
 
 
Zeeland, Michigan
 
49464-0302
 
 
(Address of principal executive offices)
 
(Zip Code)
 
Registrant's telephone number, including area code: (616) 654 3000
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock
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.
 
Yes [ X ]     No [__]
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 [__]     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).
 
Yes [__]     No [ X ]
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.































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Herman Miller, Inc. Form 10-K
Table of Contents


 
Page No.
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





PART I

Item 1 Business

General Development of Business
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
Square
Footage

 
Use
Zeeland, Michigan
770,800

 
Manufacturing, Warehouse, Office
Spring Lake, Michigan
582,800

 
Manufacturing, Warehouse, Office
Holland, Michigan
357,400

 
Warehouse
Holland, Michigan
293,100

 
Manufacturing, Office
Dongguan, China*
269,000

 
Manufacturing, Office
Holland, Michigan
238,200

 
Office, Design
Sheboygan, Wisconsin
207,700

 
Manufacturing, Warehouse, Office
Melksham, United Kingdom
170,000

 
Manufacturing, Warehouse, Office
Hildebran, North Carolina
93,000

 
Manufacturing, Office
 
 
 
 
Leased Locations
Square
Footage

 
Use
Batavia, Ohio**
617,600

 
Warehouse
Dongguan, China*
429,300

 
Manufacturing, Office
Hebron, Kentucky**
423,700

 
Warehouse
Atlanta, Georgia
180,200

 
Manufacturing, Warehouse, Office
Bangalore, India
104,800

 
Manufacturing, Warehouse
Yaphank, New York
92,000

 
Warehouse, Office
New York City, New York
66,600

 
Office, Retail
Hong Kong, China
54,400

 
Warehouse
Brooklyn, New York
39,400

 
Warehouse, Retail
Stamford, Connecticut
35,300

 
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
Age
Year Elected an Executive Officer
Position with the Company
Andrea R. Owen
54
2018
President and Chief Executive Officer
Jeremy Hocking
58
2017
President, International Contract
Gregory J. Bylsma
54
2009
President, North America Contract
Jeffrey M. Stutz
48
2009
Chief Financial Officer
B. Ben Watson
54
2010
Chief Creative Officer
Jacqueline H. Rice
47
2019
General Counsel
John McPhee
56
2015
President, Retail
Kevin Veltman
44
2015
Vice President, Investor Relations & Treasurer
Jeffrey L. Kurburski
52
2018
Chief Technology Officer
Benjamin P.T. Groom
35
2019
Chief Digital Officer
Leander D. LeSure
53
2019
Chief Human Resource Officer
Megan Lyon
39
2019
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
Market
Price
High
(at close)

 
Market
Price
Low
(at close)

 
Market
Price
Close

 
Earnings
Per Share-
Diluted

 
Dividends
Declared Per
Share

Year ended June 1, 2019:
 
 
 
 
 
 
 
 
 
First quarter
$
40.10

 
$
32.75

 
$
38.30

 
$
0.60

 
$
0.1975

Second quarter
40.65

 
31.38

 
33.86

 
0.66

 
0.1975

Third quarter
37.62

 
28.66

 
36.89

 
0.66

 
0.1975

Fourth quarter
39.70

 
33.94

 
35.49

 
0.78

 
0.1975

Year
$
40.65

 
$
28.66

 
$
35.49

 
$
2.70

 
$
0.7900

Year ended June 2, 2018:
 
 
 
 
 
 
 
 
 
First quarter
$
35.30

 
$
29.25

 
$
34.00

 
$
0.55

 
$
0.1800

Second quarter
37.00

 
32.05

 
34.55

 
0.55

 
0.1800

Third quarter
41.84

 
33.65

 
36.75

 
0.49

 
0.1800

Fourth quarter
39.20

 
29.95

 
32.85

 
0.53

 
0.1800

Year
$
41.84

 
$
29.25

 
$
32.85

 
$
2.12

 
$
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
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) 

3/3/19-3/30/19
11,253

 
34.95

 
11,253

 
$
268,232,481

3/31/19-4/27/19
60,815

 
36.61

 
60,815

 
$
266,006,033

4/28/19-6/1/19
47,498

 
37.56

 
47,498

 
$
264,222,017

Total
119,566

 


 
119,566

 
 
(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.
graph.jpg
 
2014
 
2015
 
2016
 
2017
 
2018
 
2019
Herman Miller, Inc.
$
100

 
$
90

 
$
105

 
$
111

 
$
114

 
$
126

S&P 500 Index
$
100

 
$
110

 
$
109

 
$
127

 
$
142

 
$
143

NASD Non-Financial
$
100

 
$
121

 
$
119

 
$
159

 
$
187

 
$
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)
2019
 
2018
 
2017
 
2016
 
2015
Operating Results
 
 
 
 
 
 
 
 
 
Net sales
$
2,567.2

 
$
2,381.2

 
$
2,278.2

 
$
2,264.9

 
$
2,142.2

Gross margin
929.9

 
873.0

 
864.2

 
874.2

 
791.4

Selling, general, and administrative (1)
649.5

 
621.0

 
587.5

 
585.6

 
556.6

Design and research
76.9

 
73.1

 
73.1

 
77.1

 
71.4

Operating earnings
203.5

 
178.9

 
191.1

 
211.5

 
163.4

Earnings before income taxes
195.1

 
168.1

 
177.6

 
196.6

 
145.2

Net earnings
160.5

 
128.7

 
124.1

 
137.5

 
98.1

Net cash provided by operating activities
216.4

 
166.5

 
202.1

 
210.4

 
167.7

Net cash used in investing activities
(165.0
)
 
(62.7
)
 
(116.3
)
 
(80.8
)
 
(213.6
)
Net cash (used in) provided by financing activities
(91.9
)
 
2.5

 
(74.6
)
 
(106.5
)
 
6.8

Depreciation and amortization
72.1

 
66.9

 
58.9

 
53.0

 
49.8

Capital expenditures
85.8

 
70.6

 
87.3

 
85.1

 
63.6

Common stock repurchased plus cash dividends paid
93.5

 
88.9

 
63.1

 
49.0

 
37.0

 
 
 
 
 
 
 
 
 
 
Key Ratios
 
 
 
 
 
 
 
 
 
Sales growth
7.8
%
 
4.5
%
 
0.6
 %
 
5.7
%
 
13.8
%
Gross margin (2)
36.2

 
36.7

 
37.9

 
38.6

 
36.9

Selling, general, and administrative (1) (2)
25.3

 
26.1

 
25.8

 
25.9

 
26.0

Design and research (2)
3.0

 
3.1

 
3.2

 
3.4

 
3.3

Operating earnings (2)
7.9

 
7.5

 
8.4

 
9.3

 
7.6

Net earnings growth (decline)
24.7

 
3.7

 
(9.7
)
 
40.2

 
543.9

After-tax return on net sales (3)
6.3

 
5.4

 
5.4

 
6.1

 
4.6

After-tax return on average assets (4)
10.5

 
9.2

 
9.8

 
11.3

 
9.0

After-tax return on average equity (5)
23.2
%
 
20.6
%
 
22.3
 %
 
29.1
%
 
25.0
%
 
 
 
 
 
 
 
 
 
 
Share and Per Share Data
 
 
 
 
 
 
 
 
 
Earnings per share-diluted
$
2.70

 
$
2.12

 
$
2.05

 
$
2.26

 
$
1.62

Cash dividends declared per share
0.79

 
0.72

 
0.68

 
0.59

 
0.56

Book value per share at year end (6)
12.23

 
11.22

 
9.84

 
8.76

 
7.04

Market price per share at year end
35.49

 
32.85

 
32.70

 
31.64

 
27.70

Weighted average shares outstanding-diluted
59.4

 
60.3

 
60.6

 
60.5

 
60.1

 
 
 
 
 
 
 
 
 
 
Financial Condition
 
 
 
 
 
 
 
 
 
Total assets
$
1,569.3

 
$
1,479.5

 
$
1,306.3

 
$
1,235.2

 
$
1,192.7

Working capital (7)
215.2

 
231.6

 
106.2

 
90.5

 
110.1

Current ratio (8)
1.5

 
1.6

 
1.3

 
1.2

 
1.3

Interest-bearing debt and related swap agreements (9)
282.8

 
265.1

 
197.8

 
221.9

 
290.0

Stockholders' equity
719.2

 
664.8

 
587.7

 
524.7

 
420.3

Total capital (10)
1,002.0

 
929.9

 
785.5

 
746.6

 
710.3

(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.





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
Retail
Total
Net Sales, as reported
$
1,686.5

$
492.2

$
388.5

$
2,567.2

$
1,589.8

$
434.5

$
356.9

$
2,381.2

% change from PY
6.1
%
13.3
%
8.9
%
7.8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Proforma Adjustments
 
 
 
 
 
 
 
 
Dealer Divestitures




(0.8
)


(0.8
)
Currency Translation Effects (1)
3.8

12.4

0.3

16.5





Impact of Reclassification Related to New Revenue Recognition Standard




23.9

12.3


36.2

Impact of Change in DWR Shipping Terms






(5.0
)
(5.0
)
Organic net sales
$
1,690.3

$
504.6

$
388.8

$
2,583.7

$
1,612.9

$
446.8

$
351.9

$
2,411.6

% change from PY
4.8
%
12.9
%
10.5
%
7.1
%
 
 
 
 

(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:
 
June 1, 2019
June 2, 2018
Earnings per Share - Diluted
$
2.70

$
2.12

 
 
 
Less: Adjustments Related to Adoption of U.S. Tax Cuts and Jobs Act
(0.02
)
(0.05
)
Less: Investment fair value adjustment, after tax
(0.03
)

Add: Special charges, after tax
0.18

0.16

Add: inventory step up on HAY equity method investment, after tax
0.01


Add: Restructuring expenses, after tax
0.13

0.07

Adjusted Earnings per Share - Diluted
$
2.97

$
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)
Fiscal 2019
 
Fiscal 2018
 
% Change
Net sales
$
2,567.2

 
$
2,381.2

 
7.8
 %
Cost of sales
1,637.3

 
1,508.2

 
8.6
 %
Gross margin
929.9

 
873.0

 
6.5
 %
Operating expenses
726.4

 
694.1

 
4.7
 %
Operating earnings
203.5

 
178.9

 
13.8
 %
Net other expenses
8.4

 
10.8

 
(22.2
)%
Earnings before income taxes
195.1

 
168.1

 
16.1
 %
Income tax expense
39.6

 
42.4

 
(6.6
)%
Equity income from nonconsolidated affiliates, net of tax
5.0

 
3.0

 
66.7
 %
Net earnings
160.5

 
128.7

 
24.7
 %
Net earnings attributable to noncontrolling interests

 
0.6

 
(100.0
)%
Net earnings attributable to Herman Miller, Inc.
$
160.5

 
$
128.1

 
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
100.0
%
 
100.0
%
Cost of sales
63.8

 
63.3

Gross margin
36.2

 
36.7

Selling, general and administrative expenses
24.9

 
25.8

Restructuring and impairment expenses
0.4

 
0.2

Design and research expenses
3.0

 
3.1

Total operating expenses
28.3

 
29.1

Operating earnings
7.9

 
7.5

Net other expenses
0.3

 
0.5

Earnings before income taxes
7.6

 
7.1

Income tax expense
1.5

 
1.8

Equity income from nonconsolidated affiliates, net of tax
0.2

 
0.1

Net earnings
6.3

 
5.4

Net earnings attributable to noncontrolling interests

 

Net earnings attributable to Herman Miller, Inc.
6.3

 
5.4



22 2019 Annual Report



Net Sales, Orders and Backlog - Fiscal 2019 Compared to Fiscal 2018
chart-b2188e2173695a99bda.jpgchart-5706b90e0307527b9ed.jpg
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
chart-3d115d51abcd53d48d4.jpg
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.
chart-d04de1a02f3f555ca53.jpgchart-1ef76211bd935f95b41.jpg

26 2019 Annual Report



chart-19c664d3f17b5e2a932.jpgchart-d11d3cf9a2db5f7882e.jpg
North America Contract ("North America")

 
 
Fiscal 2019
 
Fiscal 2018
 
Change
Net sales
 
$
1,686.5

 
$
1,589.8

 
$
96.7

Gross margin
 
592.3

 
565.5

 
26.8

Gross margin %
 
35.1
%
 
35.6
%
 
(0.5
)%
Operating earnings
 
189.7

 
175.2

 
14.5

Operating earnings %
 
11.2
%
 
11.0
%
 
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")
 
 
Fiscal 2019
 
Fiscal 2018
 
Change
Net sales
 
$
492.2

 
$
434.5

 
$
57.7

Gross margin
 
166.9

 
144.2

 
22.7

Gross margin %
 
33.9
%
 
33.2
%
 
0.7
%
Operating earnings
 
57.8

 
36.9

 
20.9

Operating earnings %
 
11.7
%
 
8.5
%
 
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
 
 
Fiscal 2019
 
Fiscal 2018
 
Change
Net sales
 
$
388.5

 
$
356.9

 
$
31.6

Gross margin
 
170.7

 
163.3

 
7.4

Gross margin %
 
43.9
%
 
45.8
%
 
(1.9
)%
Operating earnings
 
5.3

 
13.9

 
(8.6
)
Operating earnings %
 
1.4
%
 
3.9
%
 
(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.
 
Fiscal Year Ended
(In millions)
2019
 
2018
Cash and cash equivalents, end of period
$
159.2

 
$
203.9

Marketable securities, end of period
$
8.8

 
$
8.6

Cash provided by operating activities
$
216.4

 
$
166.5

Cash used in investing activities
$
(165.0
)
 
$
(62.7
)
Cash (used in) provided by financing Activities
$
(91.9
)
 
$
2.5

Pension contributions
$
(0.9
)
 
$
(13.4
)
Capital expenditures
$
(85.8
)
 
$
(70.6
)
Common stock repurchased
$
(47.9
)
 
$
(46.5
)
Long-term debt, end of period
$
281.9

 
$
275.0

Available unsecured credit facilities, end of period (1)
$
165.0

 
$
166.8

(1) Amounts shown are net of outstanding letters of credit, which are applied against the Company's unsecured credit facility.

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)
2019
 
2018
Maars Holding, B.V
$
6.1

 
$

HAY A/S*
$
65.5

 
$

Naughtone Holdings Limited
$
2.0

 
$

Total Cash Outflow
$
73.6

 
$

* Formerly known as Nine United Denmark A/S

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)
June 1, 2019
 
June 2, 2018
Cash and cash equivalents
$
159.2

 
$
203.9

Marketable securities
$
8.8

 
$
8.6

Availability under revolving lines of credit
$
165.0

 
$
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.
 
Payments due by fiscal year
(In millions)
Total
 
2020
 
2021-2022
 
2023-2024
 
Thereafter
Long-term debt (1)
$
275.0

 
$

 
$
275.0

 
$

 
$

Estimated interest on debt obligations (1)
73.1

 
11.8

 
19.9

 
17.5

 
23.9

Operating leases
315.8

 
51.7

 
89.7

 
72.5

 
101.9

Purchase obligations (2)
73.5

 
69.6

 
3.9

 

 

Pension and other post employment benefit plans funding (3)
0.9

 
0.4

 
0.1

 
0.1

 
0.3

Stockholder dividends (4)
11.6

 
11.6

 

 

 

Other (5)
15.3

 
5.4

 
2.3

 
1.9

 
5.7

Total
$
765.2

 
$
150.5

 
$
390.9

 
$
92.0

 
$
131.8

(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.
(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)
 
Retention Level (per occurrence)
General liability
 
$
1.00

Auto liability
 
$
1.00

Workers' compensation
 
$
0.75

Health benefit
 
$
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
2020 Expense
 
June 1, 2019 Obligation
 
U.S.
 
International
 
U.S.
 
International
Discount rate

 
$(1.4) / 1.6
 
$(0.3) / 0.3
 
$(19.6) / 25.8
Expected return on assets

 
$(1.0) / 1.0
 

 


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)
2020
 
2021
 
2022
 
2023
 
2024
 
Thereafter
 
Total(1)
Long-Term Debt - Fixed rate:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate = 6.00%
$

 
$
50.0

 
$

 
$

 
$

 
$

 
$
50.0

Interest rate = 1.949%(2)
$

 
$

 
$
150.0

 
$

 
$

 
$

 
$
150.0

Interest rate = 2.387%(2)
$

 
$

 
$
75.0

 
$

 
$

 
$

 
$
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
 
Fiscal Years Ended
(In millions, except per share data)
June 1, 2019
 
June 2, 2018
 
June 3, 2017
Net sales
$
2,567.2

 
$
2,381.2

 
$
2,278.2

Cost of sales
1,637.3

 
1,508.2

 
1,414.0

Gross margin
929.9

 
873.0

 
864.2

Operating expenses:
 
 
 
 
 
Selling, general and administrative
639.3

 
615.3

 
587.5

Restructuring and impairment expenses
10.2

 
5.7

 
12.5

Design and research
76.9

 
73.1

 
73.1

Total operating expenses
726.4

 
694.1

 
673.1

Operating earnings
203.5

 
178.9

 
191.1

Other expenses (income):
 
 
 
 
 
Interest expense
12.1

 
13.5

 
15.2

Interest and other investment income
(2.1
)
 
(4.4
)
 
(2.2
)
Other, net
(1.6
)
 
1.7

 
0.5

Net other expenses
8.4

 
10.8

 
13.5

Earnings before income taxes
195.1

 
168.1

 
177.6

Income tax expense
39.6

 
42.4

 
55.1

Equity earnings from nonconsolidated affiliates, net of tax
5.0

 
3.0

 
1.6

Net earnings
160.5

 
128.7

 
124.1

Net earnings attributable to noncontrolling interests

 
0.6

 
0.2

Net earnings attributable to Herman Miller, Inc.
$
160.5

 
$
128.1

 
$
123.9

 
 
 
 
 
 
Earnings per share — basic
$
2.72

 
$
2.15

 
$
2.07

Earnings per share — diluted
$
2.70

 
$
2.12

 
$
2.05

 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
Foreign currency translation adjustments
$
(14.2
)
 
$
2.7

 
$
(7.2
)
Pension and post-retirement liability adjustments
(7.8
)
 
10.4

 
(12.7
)
Unrealized (losses) gains on interest rate swap agreement
(12.3
)
 
7.8

 
2.1

Unrealized holding gain on available for sale securities

 

 
0.1

Total other comprehensive (loss) income
(34.3
)
 
20.9

 
(17.7
)
Comprehensive income
126.2

 
149.6

 
106.4

Comprehensive income attributable to noncontrolling interests

 
0.6

 
0.2

Comprehensive income attributable to Herman Miller, Inc.
$
126.2

 
$
149.0

 
$
106.2



Herman Miller, Inc. and Subsidiaries 39



Herman Miller, Inc.
Consolidated Balance Sheets
(In millions, except share and per share data)
June 1, 2019
 
June 2, 2018
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
159.2

 
$
203.9

Marketable securities
8.8

 
8.6

Accounts and notes receivable, less allowances of $3.8 in 2019 and $3.3 in 2018
218.0

 
217.4

Unbilled accounts receivable
34.3

 
1.9

Inventories, net
184.2

 
162.4

Prepaid taxes
9.2

 
9.9

Other
47.6

 
41.3

Total Current Assets
661.3

 
645.4

 
 
 
 
Property and Equipment:
 
 
 
Land and improvements
24.2

 
24.4

Buildings and improvements
267.6

 
238.6

Machinery and equipment
733.0

 
700.0

Construction in progress
59.9

 
57.8

Gross Property and Equipment
1,084.7

 
1,020.8

Less: Accumulated depreciation
(736.1
)
 
(689.4
)
Net Property and Equipment
348.6

 
331.4

Goodwill
303.8

 
304.1

Indefinite-lived intangibles
78.1

 
78.1

Other amortizable intangibles, net
41.1

 
41.3

Other assets
136.4

 
79.2

Total Assets
$
1,569.3

 
$
1,479.5

 
 
 
 
Liabilities, Redeemable Noncontrolling Interests and Stockholders' Equity
 
 
 
Current Liabilities:
 
 
 
Accounts payable
$
177.7

 
$
171.4

Accrued compensation and benefits
85.5

 
86.3

Accrued warranty
53.1

 
51.5

Customer deposits
30.7

 
27.6

Other accrued liabilities
99.1

 
77.0

Total Current Liabilities
446.1

 
413.8

 
 
 
 
Long-term debt, less current portion
281.9

 
275.0

Pension and post-retirement benefits
24.5

 
15.6

Other liabilities
77.0

 
79.8

Total Liabilities
829.5

 
784.2

 
 
 
 
Redeemable noncontrolling interests
20.6

 
30.5

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)
11.7

 
11.7

Additional paid-in capital
89.8

 
116.6

Retained earnings
712.7

 
598.3

Accumulated other comprehensive loss
(94.2
)
 
(61.3
)
Key executive deferred compensation
(0.8
)
 
(0.7
)
Herman Miller, Inc. Stockholders' Equity
719.2

 
664.6

Noncontrolling interests

 
0.2

Total Stockholders' Equity
719.2

 
664.8

Total Liabilities, Redeemable Noncontrolling Interests and Stockholders' Equity
$
1,569.3

 
$
1,479.5


40 2019 Annual Report



Herman Miller, Inc.
Consolidated Statements of Stockholders' Equity
 
Preferred Stock
 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Key Executive Deferred Compensation
 
Herman Miller, Inc. Stockholders' Equity
 
Noncontrolling Interests
 
Total Stockholders' Equity
(In millions, except share and per share data)
 
Shares
 
Amount
 
 
 
 
 
 
 
May 28, 2016
$

 
59,868,276

 
$
12.0

 
$
142.7

 
$
435.3

 
$
(64.5
)
 
$
(1.1
)
 
$
524.4

 
$
0.3

 
$
524.7

Net earnings

 

 

 

 
123.9

 

 

 
123.9

 
</