MillerKnoll(MLKN) - 2020 Q4 - Annual Report

Part I Business Herman Miller, Inc. designs and distributes interior furnishings globally through diverse channels, facing competitive and COVID-19 challenges in fiscal 2020 - The company operates as Herman Miller Group, encompassing brands like Herman Miller®, Design Within Reach®, and HAY®[11] - Approximately 70% of fiscal 2020 sales were through independent dealers, with the rest from direct sales, owned dealers, retail studios, and e-commerce[18] - The largest single customer accounted for approximately 5% of net sales in fiscal 2020, with the top 10 customers representing about 18% of net sales[24] - Order backlog increased to $470.8 million as of May 30, 2020, from $394.2 million due to COVID-19 related processing delays[25] Research and Development Expenses (Fiscal Years 2018-2020) | Fiscal Year | R&D Spending (in millions) | | :--- | :--- | | 2020 | $54.3 | | 2019 | $58.8 | | 2018 | $57.1 | Risk Factors The company faces significant risks including growth strategy failure, pandemic impacts, tariffs, economic downturns, intense competition, international operational complexities, cybersecurity threats, and potential asset impairment - The COVID-19 pandemic adversely impacted operations and financial results through supply chain disruptions, facility curtailments, and reduced office furniture demand[48] - U.S government tariffs, especially on Chinese imports, increased raw material and finished goods costs, with Chinese purchases representing an estimated 6% of consolidated cost of sales in fiscal 2020[49] - Significant competition exists in the office furniture market from players like Haworth and Steelcase, and in retail from companies like Crate & Barrel and Wayfair[53][54] - Substantial goodwill and indefinite-lived intangible assets are subject to annual impairment testing, with potential for material charges from market declines or poor financial performance[76] Unresolved Staff Comments The company reports no unresolved staff comments - None[78] Properties As of May 30, 2020, the company owns and leases significant manufacturing, warehouse, and office facilities globally, including 39 retail studios, all deemed adequate for current needs Most Significant Owned and Leased Facilities (as of May 30, 2020) | Location | Use | Square Footage (Thousands) | Ownership | | :--- | :--- | :--- | :--- | | Zeeland, MI | Manufacturing, Warehouse, Office | 771 | Owned | | Spring Lake, MI | Manufacturing, Warehouse, Office | 583 | Owned | | Batavia, OH | Warehouse | 618 | Leased | | Dongguan, China | Manufacturing, Office | 429 | Leased | - As of May 30, 2020, the company operated 39 retail studios, including DWR and HAY brands, totaling approximately 400,000 square feet of selling space[82] Legal Proceedings The company is involved in routine legal proceedings, with management expecting no material impact on consolidated operations, cash flows, or financial condition - Management believes pending legal proceedings will not materially affect the company's consolidated operations, cash flows, or financial condition[84] Executive Officers of the Registrant The report lists executive officers as of May 30, 2020, including Andrea R. Owen (CEO) and Jeffrey M. Stutz (CFO), with their positions and election years - Andrea R. Owen, age 55, has served as President and Chief Executive Officer since 2018[85][90] - Jeffrey M. Stutz, age 49, has served as Chief Financial Officer since 2009[89] Mine Safety Disclosures This item is not applicable to the company - Not applicable[95] Part II Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities Herman Miller's common stock trades on NASDAQ (MLHR), with future dividends suspended due to COVID-19 uncertainty, and $237.6 million remaining for share repurchases as of May 30, 2020 - The company's common stock trades on the NASDAQ-Global Select Market System under the symbol MLHR[96] - Future dividend payments are suspended due to COVID-19 uncertainty, though the deferred Q3 fiscal 2020 dividend was paid on July 15, 2020[97] - As of May 30, 2020, $237.6 million remained available for share repurchases under the $250.0 million January 2019 authorization[98] Selected Financial Data Fiscal 2020 saw net sales decrease to $2.49 billion, with an operating loss of $38.4 million and a net loss of $14.4 million due to a $205.4 million impairment charge, resulting in diluted EPS of $(0.15) Selected Financial Data (FY2020 vs. FY2019) | Metric (In millions, except per share data) | Fiscal 2020 | Fiscal 2019 | | :--- | :--- | :--- | | Net sales | $2,486.6 | $2,567.2 | | Gross margin | $910.7 | $929.9 | | Operating (loss) earnings | $(38.4) | $203.5 | | Net (loss) earnings | $(14.4) | $160.5 | | (Loss) earnings per share-diluted | $(0.15) | $2.70 | | Cash dividends declared per share | $0.63 | $0.79 | | Total assets | $2,053.9 | $1,569.3 | | Total interest-bearing debt | $558.8 | $282.8 | | Stockholders' equity | $643.0 | $719.2 | Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal 2020 net sales decreased to $2.49 billion due to COVID-19, resulting in a $14.4 million net loss driven by a $205.4 million impairment charge, while the company focused on liquidity preservation and strategic growth initiatives Executive Overview and Strategy The company operates through North America Contract, International Contract, and Retail segments, leveraging brand strength and global reach, with a strategy focused on integration, digital transformation, profitable growth, and social responsibility - The company is organized into three reportable segments: North America Contract, International Contract, and Retail[115][117][119] - Strategic priorities include unlocking 'One Herman Miller', building a customer-centric digital model, accelerating profitable growth, and reinforcing social and environmental commitment[125][126][127][128] COVID-19 Update The COVID-19 pandemic adversely impacted fiscal 2020, prompting safety measures, temporary manufacturing disruptions, and cost reductions including a 400-employee workforce reduction and dividend suspension - The company implemented safety measures such as travel restrictions, work-from-home policies, and temporary closure of showrooms and retail studios to the public[136] - Cost reduction actions included a salaried workforce reduction of approximately 400 employees, a 10% cash compensation reduction, and temporary suspension of quarterly dividends and retirement contributions[143] Results of Operations (FY2020 vs FY2019) Fiscal 2020 net sales fell 3.1% to $2.487 billion due to COVID-19, leading to a $14.4 million net loss, primarily driven by a $205 million impairment charge and increased operating expenses, despite gross margin improvement FY 2020 Financial Highlights vs. FY 2019 | Metric (in millions) | FY 2020 | FY 2019 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $2,486.6 | $2,567.2 | (3.1)% | | Gross Margin | $910.7 | $929.9 | (2.1)% | | Operating (Loss) Earnings | $(38.4) | $203.5 | (118.9)% | | Net (Loss) Earnings | $(14.4) | $160.5 | (109.0)% | - Net sales decreased due to lower volumes from COVID-19 ($213 million), partially offset by acquisitions ($96 million) and net price increases ($45 million)[153] - Operating expenses increased by $222.7 million, primarily due to a $205 million non-cash impairment charge and a $16 million increase in restructuring expenses[155][159] - A pre-tax gain of $36.2 million was recorded from the purchase accounting treatment of initial equity-method investments in naughtone and HAY upon gaining majority ownership[155] Segment Performance Fiscal 2020 saw North America Contract sales decrease 5.2% to $1.60 billion, International Contract sales grow 2.2% to $502.8 million, and Retail sales dip 0.7% to $385.6 million, with all segments impacted by impairment charges and lower operating earnings Segment Net Sales (FY2020 vs. FY2019) | Segment (in millions) | FY 2020 | FY 2019 | % Change | | :--- | :--- | :--- | :--- | | North America Contract | $1,598.2 | $1,686.5 | (5.2)% | | International Contract | $502.8 | $492.2 | 2.2% | | Retail | $385.6 | $388.5 | (0.7)% | Segment Operating Earnings (Loss) (FY2020 vs. FY2019) | Segment (in millions) | FY 2020 | FY 2019 | Change | | :--- | :--- | :--- | :--- | | North America Contract | $130.9 | $189.7 | $(58.8) | | International Contract | $18.2 | $57.8 | $(39.6) | | Retail | $(148.3) | $5.3 | $(153.6) | Liquidity and Capital Resources Cash from operations was $221.8 million, investing used $168.1 million for acquisitions, and financing provided $244.0 million from credit facility draws and debt, ending with $454.0 million cash, with share repurchases and dividends suspended for liquidity Summary of Cash Flows (in millions) | Activity | FY 2020 | FY 2019 | | :--- | :--- | :--- | | Cash from Operating Activities | $221.8 | $216.4 | | Cash used in Investing Activities | $(168.1) | $(165.0) | | Cash from (used in) Financing Activities | $244.0 | $(91.9) | - In March 2020, the company drew $265 million from its revolving credit facility as a COVID-19 precautionary measure, which was repaid in June 2020[131][181] Contractual Obligations Summary (in millions) | Obligation | Total | Due in 2021 | Due in 2022-2023 | Due in 2024-2025 | Thereafter | | :--- | :--- | :--- | :--- | :--- | :--- | | Debt | $591.4 | $51.4 | $— | $490.0 | $50.0 | | Operating Leases | $270.4 | $48.5 | $85.0 | $65.0 | $71.9 | | Purchase Obligations | $79.8 | $77.2 | $2.6 | $— | $— | | Total | $1,046.4 | $206.5 | $106.4 | $573.4 | $160.1 | Critical Accounting Policies and Estimates Critical accounting policies involve significant estimates for business combinations, goodwill, and intangible assets, leading to $205.4 million in non-cash impairment charges in fiscal 2020 due to COVID-19 impacts on goodwill, tradenames, and other long-lived assets FY2020 Impairment Charges (in millions) | Asset Type | Impairment Charge | | :--- | :--- | | Goodwill | $125.5 | | Indefinite-lived intangible assets | $53.3 | | Customer relationship intangible assets | $7.0 | | Right of use assets and other long-lived assets | $19.6 | | Total | $205.4 | - Goodwill impairment charges of $125.5 million were recognized for the Retail ($88.8 million) and Maharam ($36.7 million) reporting units, primarily due to reduced projections from the COVID-19 pandemic[207][208] - The International Contract reporting unit, with $163.7 million of goodwill, had a fair value exceeding its carrying value by 17%, indicating future impairment risk if cash flows decline[208][211][212] - A Q4 2020 triggering event led to a $26.6 million long-lived asset impairment charge, primarily for DWR right-of-use assets and customer relationship intangibles[222] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from material costs, foreign currency, and interest rates, using forward contracts for currency and interest rate swaps to convert $225 million of floating-rate debt to fixed rates, with commodity price changes lowering costs by $4 million in fiscal 2020 - The company is exposed to direct material price changes, with commodity price changes, including Chinese tariffs, resulting in an approximate $4 million cost decrease in fiscal 2020[228] - Foreign currency forward contracts are used to offset risks from non-functional currency transactions, with twenty instruments outstanding as of May 30, 2020[230][231] - Two interest rate swap agreements with a total notional amount of $225 million convert LIBOR-based floating-rate debt to fixed rates (1.949% and 2.387%), mitigating interest rate risk[238][239] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for fiscal 2020, including comprehensive income, balance sheets, equity, and cash flows, along with notes detailing impairment charges, acquisitions, lease accounting adoption, and restructuring activities Consolidated Financial Statements Overview Fiscal 2020 consolidated financial statements show a $9.1 million net loss, a significant shift from $160.5 million net earnings in 2019, driven by impairment and restructuring charges, with total assets growing to $2.05 billion and liabilities to $1.36 billion Consolidated Statement of Comprehensive Income Highlights (in millions) | Line Item | FY 2020 | FY 2019 | FY 2018 | | :--- | :--- | :--- | :--- | | Net sales | $2,486.6 | $2,567.2 | $2,381.2 | | Gross margin | $910.7 | $929.9 | $873.0 | | Operating (loss) earnings | $(38.4) | $203.5 | $178.9 | | Impairment charges | $205.4 | $— | $— | | Net (loss) earnings attributable to Herman Miller, Inc. | $(9.1) | $160.5 | $128.1 | Consolidated Balance Sheet Highlights (in millions) | Line Item | May 30, 2020 | June 1, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $454.0 | $159.2 | | Total current assets | $917.1 | $661.3 | | Goodwill | $346.0 | $303.8 | | Total Assets | $2,053.9 | $1,569.3 | | Total current liabilities | $513.3 | $446.1 | | Long-term debt | $539.9 | $281.9 | | Total Liabilities | $1,360.5 | $829.5 | | Total Stockholders' Equity | $643.0 | $719.2 | Note 1. Significant Accounting and Reporting Policies This note details key accounting policies, including annual impairment tests for goodwill and indefinite-lived intangibles, resulting in $125.5 million and $53.3 million charges respectively in fiscal 2020, and the adoption of ASC 842 for lease accounting - The company adopted ASU 2016-02 (Leases) in fiscal 2020, recognizing approximately $245 million in right-of-use assets and $275 million in lease liabilities upon adoption[295][311][364] - Goodwill impairment charges of $125.5 million were recorded in fiscal 2020 for the Retail ($88.8 million) and Maharam ($36.7 million) reporting units[270] - Impairment charges of $53.3 million were recognized for the DWR, Maharam, HAY, and naughtone tradenames[274] Note 2. Revenue from Contracts with Customers Fiscal 2020 revenue disaggregation shows $2.12 billion from single performance obligation contracts and $347.8 million from multiple, with Seating ($1.04 billion) and Systems ($589.3 million) as largest product categories Revenue by Product Type (in millions) | Product Type | FY 2020 | FY 2019 | | :--- | :--- | :--- | | Systems | $589.3 | $668.0 | | Seating | $1,041.6 | $1,013.5 | | Freestanding and storage | $496.9 | $505.4 | | Textiles | $138.8 | $113.8 | | Other | $220.0 | $266.5 | | Total | $2,486.6 | $2,567.2 | Note 3. Acquisitions and Divestitures In fiscal 2020, the company acquired controlling interests in naughtone ($45.9 million) and HAY ($79.0 million), resulting in a combined $30.3 million non-taxable gain from remeasuring previously held equity interests and adding significant goodwill and intangibles - Acquired the remaining 47.5% of naughtone for $45.9 million, achieving 100% ownership and consolidation[336] - Acquired an additional 34% of HAY for $79.0 million, increasing ownership to a controlling 67% and leading to consolidation[328] - The acquisitions resulted in a non-taxable gain of approximately $30.0 million for naughtone and $0.3 million for HAY from remeasuring previously held equity interests[332][337] Note 6. Short-Term Borrowings and Long-Term Debt As of May 30, 2020, total debt increased to $591.3 million, including $490.0 million from the syndicated revolving line of credit and $50.0 million in new senior notes, with the company in compliance with all debt covenants Total Debt Composition (in millions) | Debt Instrument | May 30, 2020 | June 1, 2019 | | :--- | :--- | :--- | | Debt securities, 6.0%, due 2021 | $50.0 | $50.0 | | Debt securities, 4.95%, due 2030 | $49.9 | $— | | Syndicated Revolving Line of Credit | $490.0 | $225.0 | | Other | $1.4 | $10.0 | | Total debt | $591.3 | $285.0 | Note 7. Leases The company adopted ASC 842 in fiscal 2020, recognizing $193.9 million in right-of-use assets and $243.9 million in lease liabilities, with total lease expense of $62.1 million and a $19.3 million impairment charge on right-of-use assets - Upon adoption of ASC 842, the company recognized approximately $245 million of ROU assets and $275 million of lease liabilities[364] - Total lease expense for fiscal 2020 was $62.1 million, including $51.3 million in operating lease costs[371] - An impairment of $19.3 million was recorded on right-of-use assets during the fourth quarter of fiscal 2020[372] Note 10. Stock-Based Compensation The company uses stock options, RSUs, and PSUs for compensation, with total pre-tax stock-based compensation expense at $2.7 million in fiscal 2020, down from $7.3 million in 2019, and $3.2 million in unrecognized compensation cost remaining Pre-tax Stock-Based Compensation Expense (in millions) | Award Type | FY 2020 | FY 2019 | FY 2018 | | :--- | :--- | :--- | :--- | | Employee stock purchase program | $0.3 | $0.3 | $0.3 | | Stock option plans | $0.6 | $(0.4) | $2.6 | | Restricted stock units | $3.9 | $4.6 | $3.9 | | Performance share units | $(2.1) | $2.8 | $0.9 | | Total | $2.7 | $7.3 | $7.7 | Note 11. Income Taxes Fiscal 2020's effective tax rate was -44.9% due to a pre-tax loss and a $17.1 million non-deductible goodwill impairment charge, partially offset by tax benefits, with a $10.6 million valuation allowance against deferred tax assets - The effective tax rate was -44.9% for fiscal 2020, significantly deviating from the 21% U.S statutory rate[417] - Key tax rate reconciliation factors include a $17.1 million tax expense from non-deductible goodwill impairment and a $5.5 million tax benefit from the non-taxable gain on equity method investment consolidation[417] - A valuation allowance of $10.6 million is recorded against deferred tax assets as of May 30, 2020, primarily for foreign NOLs and other foreign deferred assets[418][423][424] Note 12. Fair Value and Derivative Instruments The company uses foreign currency forward contracts and interest rate swaps to manage market risks, with interest rate swaps having a net liability fair value of $25.0 million as of May 30, 2020, and redeemable noncontrolling interests related to HAY classified as mezzanine equity - The fair value of the two outstanding interest rate swap agreements was a net liability of $25.0 million as of May 30, 2020, compared to a $1.2 million net liability at June 1, 2019[447] - Redeemable noncontrolling interests for the remaining 33% of HAY are carried at an estimated redemption amount of $50.4 million and classified outside of permanent equity[452][455] Note 13. Commitments and Contingencies The company provides 12-year product warranties, with a $59.2 million reserve at fiscal 2020 end, and has commitments under performance bonds ($4.4 million) and standby letters of credit ($9.4 million) with no recorded liability Warranty Reserve Activity (in millions) | Period | Beginning Balance | Accruals | Settlements | Ending Balance | | :--- | :--- | :--- | :--- | :--- | | FY 2020 | $53.1 | $23.7 | $(17.6) | $59.2 | | FY 2019 | $51.5 | $20.7 | $(19.1) | $53.1 | Note 16. Restructuring Expenses Total restructuring expenses reached $26.4 million in fiscal 2020, up from $10.2 million in 2019, primarily due to a $15.3 million charge in Q4 for a COVID-19 response plan involving the elimination of approximately 400 positions - In Q4 2020, a COVID-19 restructuring plan resulted in a $15.3 million charge for severance costs related to eliminating approximately 400 positions[486] Restructuring Expenses by Segment (in millions) | Segment | FY 2020 | FY 2019 | FY 2018 | | :--- | :--- | :--- | :--- | | North America Contract | $18.7 | $7.7 | $1.8 | | International Contract | $4.8 | $2.5 | $3.9 | | Retail | $2.9 | $— | $— | | Total | $26.4 | $10.2 | $5.7 | Note 18. Quarterly Financial Data (Unaudited) This note summarizes unaudited quarterly financial data for fiscal 2020, 2019, and 2018, highlighting a sharp Q4 2020 decline with net sales of $475.7 million and a $173.7 million net loss due to COVID-19 and impairment charges Fiscal 2020 Unaudited Quarterly Results (in millions, except per share data) | Quarter | Net Sales | Gross Margin | Net Earnings (Loss) Attributable to HMI | Diluted EPS | | :--- | :--- | :--- | :--- | :--- | | Q1 | $670.9 | $246.1 | $48.2 | $0.81 | | Q2 | $674.2 | $255.5 | $78.6 | $1.32 | | Q3 | $665.7 | $243.3 | $37.7 | $0.64 | | Q4 | $475.7 | $165.8 | $(173.7) | $(2.95) | Management's Report on Internal Control & Independent Auditor's Report Management concluded internal control over financial reporting was effective as of May 30, 2020, excluding recent acquisitions, while KPMG LLP issued an unqualified opinion, highlighting critical audit matters including intangible asset valuation and impairment assessments for goodwill, tradenames, and long-lived assets - Management assessed internal control over financial reporting as effective as of May 30, 2020, excluding the recently acquired naughtone and HAY entities[496][497] - KPMG LLP issued an unqualified opinion on financial statements and internal controls, identifying critical audit matters including HAY's intangible asset valuation and impairment assessments for goodwill, tradenames, and long-lived assets[500][510] Changes in and Disagreements with Accountants on Accounting and Financial Disclosures The company reports no disagreements with its accountants on accounting principles, financial disclosure, or auditing scope - None[535] Controls and Procedures Management, including the CEO and CFO, concluded disclosure controls and procedures were effective as of May 30, 2020, with no material changes in internal control over financial reporting during Q4 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of May 30, 2020[536] - No material changes in internal control over financial reporting occurred during the fourth quarter[536] Other Information The company reports no other information for this item - None[536] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance, including the code of ethics, is incorporated by reference from the company's 2020 Proxy Statement - Information on directors, executive officers, Section 16(a) compliance, code of ethics, and corporate governance is incorporated by reference from the company's 2020 Proxy Statement[537][538][539][540] Executive Compensation Detailed executive compensation information, including Compensation Discussion and Analysis and compensation tables, is incorporated by reference from the company's 2020 Proxy Statement - All executive compensation information is incorporated by reference from the company's 2020 Proxy Statement[541] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership of beneficial owners and management, and equity compensation plans, is incorporated by reference from the company's 2020 Proxy Statement - Information on security ownership and equity compensation plans is incorporated by reference from the company's 2020 Proxy Statement[542] Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the company's 2020 Proxy Statement - Information on related party transactions and director independence is incorporated by reference from the company's 2020 Proxy Statement[544] Principal Accountant Fees and Services Information on fees paid to and services provided by the principal accounting firm is incorporated by reference from the company's 2020 Proxy Statement - Information on principal accountant fees and services is incorporated by reference from the company's 2020 Proxy Statement[545] Part IV Exhibits and Financial Statement Schedule This section lists documents filed as part of the Form 10-K, including consolidated financial statements, schedule II, and a comprehensive index of exhibits like articles of incorporation and material contracts - This section provides an index of all financial statements, schedules, and exhibits filed with the Form 10-K[547][549][551] Form 10-K Summary The company reports no summary for this item - None[558]