SEC Company Response from MILLERKNOLL, INC. (MLKN) (CIK 0000066382) (MLKN) — Dec 4, 2009
MILLERKNOLL, INC. (MLKN) (CIK 0000066382)
Date: Dec. 4, 2009 · CIK: 0000066382 · Accession: 0000926044-09-000585
AI Filing Summary & Sentiment
Reasoning
Letter
Division of Corporate Finance Re: Herman Miller, Inc. Form 10-K for the year ended May 30, 2009 Form 10-Q for the period ended August 29, 2009 File No. 1-15141
Dear Mr. Decker:
This letter responds to your follow-up letter, dated October 26, 2009, regarding the referenced filing. The comments from your letter are set forth in bold font below and are followed by our response.
FORM 10-K FOR THE YEAR ENDED MAY 30, 2009
General
1. Where a comment below requests additional disclosures or other revisions to be made, these revisions should be included in your future filings, including your interim filings, if applicable.
Response:
We will include the required, additional disclosures in our future filings on form 10-K and, if applicable, interim filings.
Critical Accounting Policies and Estimates
Goodwill, page 33
2. In the interest of providing readers with a better insight into management's judgments in accounting for goodwill, please consider disclosing the following:
The reporting unit level at which you test goodwill for impairment and your basis for that determination;
How you weight each of the methods used to value goodwill, including the basis for that weighting;
How the methodologies used for valuing goodwill in the current year have changed since the prior year; and
To the extent that any of your reporting units have estimated fair values that are not substantially in excess of the carrying values and to the extent that goodwill for these reporting units, in the aggregate or individually, could materially impact your operating results or total shareholders' equity, please provide the following disclosures for each of these reporting units:
The percentage by which fair value exceeds the carrying value as of the most recent step-one test;
The amount of goodwill;
A description of the assumptions that drive the estimated fair value;
A discussion of the uncertainty associated with the key assumptions. For example, to the extent that you have included assumptions in your projected cash flow model that materially deviate from your historical results, please include a discussion of these assumptions; and
A discussion of any potential events and/or circumstances that could have a negative effect to the estimated fair value.
Mr. Rufus Decker
December 4, 2009
Page 2
If you have determined that the estimated fair value substantially exceeds the carrying value for all of your reporting units, please disclose this determination. Please also provide the above disclosures, as applicable, for any long-lived assets or asset groups for which you have determined that fair value is not substantially in excess of the carrying value and to the extent that the asset amounts, in the aggregate or individually, could materially impact your operating results or total shareholders' equity. Please refer to Item 303 of Regulation S-K and Sections 216 and 501.14 of the Financial Reporting Codification for guidance.
Response:
· Management will disclose additional information about the reporting unit level that goodwill impairment is tested at and the basis for determining the reporting unit. Future filings will include disclosures substantially in accordance with the Example disclosure set forth at the end of this comment #2. The example is based upon our results for the period ended May 30, 2009.
· Management currently uses two methods for valuing goodwill and both have historically passed the step one testing, and as a result, a discussion of weighting has not been relevant. However, Management will consider disclosing the weighting of methodologies in future periods to the extent that discussion would be relevant. Please see the Example disclosure below.
· Management will disclose change in testing methodologies in periods when the methodologies change. Management does not currently believe that the testing methodologies being utilized will change in the near term.
· To the extent that a reporting unit has an estimated fair value that is not substantially in excess of the carrying value and to the extent that goodwill impairment could materially impact operating results or total shareholder’s equity, management will disclose:
Mr. Rufus Decker
December 4, 2009
Page 3
o The percentage by which fair value exceeds the carrying value as of the most recent step-one test.
o The amount of goodwill.
o A description of the assumptions that drive the estimated fair value.
o A discussion of the uncertainty associated with the key assumptions.
o A discussion of any potential events and/or circumstances that could have a negative effect to the estimated fair value.
· If Management determines that the estimated fair value of a reporting unit substantially exceeds the carrying value, we will disclose that determination. Please see the Example disclosure below.
· Management will extend the above disclosures to any long-lived assets, or asset groups, for which we determine that fair value is not substantially in excess of the carrying value, either in the aggregate or individually, or for which these asset amounts could materially impact operating results or shareholder’s equity.
Example Disclosure: Critical Accounting Policies and Estimates – Goodwill
The carrying value of our recorded goodwill as of May 30, 2009 and May 31, 2008, totaled $69.5 million and $40.2 million, respectively. The increase in goodwill relates primarily to our final payment for the acquisition of Brandrud and the acquisition of certain elements of Ruskin Industries. We account for our goodwill in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 350 (ASC 350). Under ASC 350, we are required to perform an annual test on our goodwill, by reporting unit, to determine whether the asset values are impaired. A reporting unit is defined as an operating segment or one level below an operating segment. Substantially all of our goodwill is within the North American operating segment (see footnote 20), which has been determined to be made up of two reporting units. Pursuant to ASC 350, the annual goodwill test is comprised of two steps. The first step compares the fair value of the reporting unit with its carrying amount, including goodwill. The second step used to measure the amount of impairment loss compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the first step of the test is passed then goodwill is not considered impaired and the second step is unnecessary. If an impairment results from these tests, we are required to reduce the net carrying value of the assets to their estimated fair market value.
Our impairment-testing model is based partly on an income-based approach that considers the present value of projected cash flows and the resulting residual value and partly on a market-based approach that considers recent market capitalization values. In completing the test under this approach, we assume that one of the drivers of the value of a business today is the cash flows it will generate in the future. We also assume that such future cash flows can be reasonably estimated. While these projected cash flows reflect our best estimate of future reporting unit performance, actual cash flows could differ significantly. Historically, both of these approaches have passed the step one testing.
We performed our goodwill tests in the fourth quarter of fiscal 2009. Both the projected cash flows and the market-based approach tests passed the step-one tests by substantial margins for all reporting units, which indicates that our goodwill is not impaired. We employed a market-based approach in selecting the discount rates used in our analysis. By this, we mean the discount rates selected represent market
Mr. Rufus Decker
December 4, 2009
Page 4
rates of return equal to what we believe a reasonable investor would expect to achieve on investments of similar size to our reporting units. We believe the market participant based discount rates selected in our testing exceed the estimated weighted average cost of capital for our specific business as a whole. The results of the impairment test are sensitive to changes in discount rates, though the testing performed in fiscal 2009 would indicate that even a significant increase in the discount rate would not have changed the result.
Pension and Other Post-Retirement Benefits, page 34
3. If reasonably likely changes in the significant assumptions you discuss related to pension and other post-retirement benefits could have a material effect on your financial condition, operating performance, or liquidity, please disclose the estimated amount of the impact of these changes based on the range of reasonably likely outcomes. Refer to Section 501.14 of the Financial Reporting Codification for guidance.
Response:
Management will disclose the potential effects of changes in the significant assumptions related to pension benefits that reasonably could have a material effect on financial condition, operating performance or liquidity in future filings. This disclosure would take the form of a sensitivity analysis by significant assumption.
Please see the following example disclosure that Management would use if necessary.
Example Disclosure: Sensitivity Analysis
Changes in the discount rate and return on assets can have a significant effect on the expense or obligations related to our pension plans. We cannot predict these changes in discount rates or investment returns and, therefore, cannot reasonably estimate whether adjustments to our expense or obligation in subsequent years will be significant. Both the May XX, 2010 pension funded status and 2011 expense are affected by year-end 2010 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. The effect of the indicated increase/(decrease) in discount rates and expected return on assets is shown below:
In Millions
Assumption
1 Percent Change
2011 Expense
May XX, 2010 Obligation
U.S.
International
U.S.
International
Discount rate
+/- 1.0
$xx / (xx)
$xx / (xx)
$xx / (xx)
$xx / (xx)
Expected return on assets
+/- 1.0
$xx / (xx)
$xx / (xx)
$xx / (xx)
$xx / (xx)
Mr. Rufus Decker
December 4, 2009
Page 5
Management's Discussion and Analysis
Discussion of Business Segments – Fiscal 2009 Compared to Fiscal 2008, page 23
4. The "Other" category consists primarily of your North American Home and start-up businesses and certain unallocated corporate expenses. Other segment operating earnings (loss) is material to total operating earnings for the year ended May 30, 2009 and the interim period ended August 29, 2009. Please revise your segment MD&A to separately discuss with quantification business reasons for significant changes between periods in the operating earnings for the businesses included in other as well as corporate expenses.
Response:
Management agrees to separately discuss, with quantification, business reasons for significant changes between periods in the operating earnings for those businesses and corporate expenses included within the “Other” segment category. Please see example disclosure below.
Net sales within the “Other” segment category were $42 million in fiscal 2009 compared to $52 million in the prior year. The decrease is the result of net sales declining within our North American Home business, primarily due to the challenges associated with the U.S. macroeconomic environment. This overall decrease was somewhat offset by sales to a new retail customer. Operating losses within our “Other” segment category totaled $25.3 million for the year or (1.6) percent of net sales. This compares to income of $3.4 million or 0.2 percent of net sales in the prior year, a decrease of 180 basis points. Certain costs are not allocated between the three operating segments. Those costs that are determined to be the result of isolated business decisions are not subject to allocation and are evaluated separately from routine business operations. Restructuring expense is such a cost that has been allocated solely to the “Other” segment category in both fiscal 2009 and fiscal 2008, with $28.4 million and $5.1 million of restructuring expenses, respectively. The decline in operating in operating income is primarily attributable to the increase in restructuring expense and secondarily to the decline in net sales.
Financial Statements
Notes to the Financial Statements
Note 1. Significant Accounting and Reporting Policies, page 46
General
5. Your disclosures on page 33 indicate that you enter into arrangements to provide consideration to your customers. If you pay slotting fees, engage in cooperative advertising programs, have buydown programs, or make other payments to resellers, please disclose your accounting policy for each of these types of arrangements, including the statement of operations
Mr. Rufus Decker
December 4, 2009
Page 6
line item that each type of arrangement is included in. For each expense line item that includes these types of arrangements, please disclose the related amounts included in that line item. For each type of arrangement treated as an expense rather than as a reduction of revenues, please tell us how this type of arrangement meets the requirements in EITF 01-9. Please also discuss in MD&A any significant estimates resulting from these arrangements.
Response:
The Company does have programs whereby we provide consideration to our customers. Management agrees to disclose any significant programs and the accounting policy for such programs, including the related amounts for each expense line item. The Company engages in a cooperative advertising program that is treated as expense in the statement of operations. We have applied subtopic 605-50-45-2 in making this determination. As such, Management has determined that our cooperative advertising partners receive a separately identifiable benefit in return for consideration and that the fair value of the benefit received is equal to or exceeds the value of the consideration given.
Management agrees to discuss any significant estimates resulting from these arrangements in the MD&A section. Future filings will include disclosures substantially in accordance with the example below:
Example Disclosure: Customer Payments and Incentives
We offer various sales incentive programs to our customers, such as rebates, discounts, buy-downs and cooperative advertising programs. The company accounts for these programs in accordance with Accounting Standards Codification (ASC) subtopic 605-50 Customer Payments and Incentives. Consistent with this guidance, we have determined that programs such as rebates, discounts and buy-downs are adjustments to the selling price and are therefore characterized as a reduction to net sales. The cooperative advertising program, whereby customers are reimbursed for company approved advertising expenditures, provides us with an identifiable benefit from the advertisement at a verifiable market rate. Therefore, the cost of the cooperative advertising program is recognized as an operating expense and is included in the selling, general and administrative line in the statement of operations. As o
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filename1.htm
hmi-corr_120409.htm - Generated by SEC Publisher for SEC Filing
HERMAN MILLER, INC.
December 4, 2009
Mr. Rufus Decker
Accounting Branch Chief
Division of Corporate Finance
U.S. Securities and Exchange Commission
Washington, DC 20549-4631
Re: Herman Miller, Inc.
Form 10-K for the year ended May 30, 2009
Form 10-Q for the period ended August 29, 2009
File No. 1-15141
Dear Mr. Decker:
This letter responds to your follow-up letter, dated October 26, 2009, regarding the referenced filing. The comments from your letter are set forth in bold font below and are followed by our response.
FORM 10-K FOR THE YEAR ENDED MAY 30, 2009
General
1. Where a comment below requests additional disclosures or other revisions to be made, these revisions should be included in your future filings, including your interim filings, if applicable.
Response:
We will include the required, additional disclosures in our future filings on form 10-K and, if applicable, interim filings.
Critical Accounting Policies and Estimates
Goodwill, page 33
2. In the interest of providing readers with a better insight into management's judgments in accounting for goodwill, please consider disclosing the following:
The reporting unit level at which you test goodwill for impairment and your basis for that determination;
How you weight each of the methods used to value goodwill, including the basis for that weighting;
How the methodologies used for valuing goodwill in the current year have changed since the prior year; and
To the extent that any of your reporting units have estimated fair values that are not substantially in excess of the carrying values and to the extent that goodwill for these reporting units, in the aggregate or individually, could materially impact your operating results or total shareholders' equity, please provide the following disclosures for each of these reporting units:
The percentage by which fair value exceeds the carrying value as of the most recent step-one test;
The amount of goodwill;
A description of the assumptions that drive the estimated fair value;
A discussion of the uncertainty associated with the key assumptions. For example, to the extent that you have included assumptions in your projected cash flow model that materially deviate from your historical results, please include a discussion of these assumptions; and
A discussion of any potential events and/or circumstances that could have a negative effect to the estimated fair value.
Mr. Rufus Decker
December 4, 2009
Page 2
If you have determined that the estimated fair value substantially exceeds the carrying value for all of your reporting units, please disclose this determination. Please also provide the above disclosures, as applicable, for any long-lived assets or asset groups for which you have determined that fair value is not substantially in excess of the carrying value and to the extent that the asset amounts, in the aggregate or individually, could materially impact your operating results or total shareholders' equity. Please refer to Item 303 of Regulation S-K and Sections 216 and 501.14 of the Financial Reporting Codification for guidance.
Response:
· Management will disclose additional information about the reporting unit level that goodwill impairment is tested at and the basis for determining the reporting unit. Future filings will include disclosures substantially in accordance with the Example disclosure set forth at the end of this comment #2. The example is based upon our results for the period ended May 30, 2009.
· Management currently uses two methods for valuing goodwill and both have historically passed the step one testing, and as a result, a discussion of weighting has not been relevant. However, Management will consider disclosing the weighting of methodologies in future periods to the extent that discussion would be relevant. Please see the Example disclosure below.
· Management will disclose change in testing methodologies in periods when the methodologies change. Management does not currently believe that the testing methodologies being utilized will change in the near term.
· To the extent that a reporting unit has an estimated fair value that is not substantially in excess of the carrying value and to the extent that goodwill impairment could materially impact operating results or total shareholder’s equity, management will disclose:
Mr. Rufus Decker
December 4, 2009
Page 3
o The percentage by which fair value exceeds the carrying value as of the most recent step-one test.
o The amount of goodwill.
o A description of the assumptions that drive the estimated fair value.
o A discussion of the uncertainty associated with the key assumptions.
o A discussion of any potential events and/or circumstances that could have a negative effect to the estimated fair value.
· If Management determines that the estimated fair value of a reporting unit substantially exceeds the carrying value, we will disclose that determination. Please see the Example disclosure below.
· Management will extend the above disclosures to any long-lived assets, or asset groups, for which we determine that fair value is not substantially in excess of the carrying value, either in the aggregate or individually, or for which these asset amounts could materially impact operating results or shareholder’s equity.
Example Disclosure: Critical Accounting Policies and Estimates – Goodwill
The carrying value of our recorded goodwill as of May 30, 2009 and May 31, 2008, totaled $69.5 million and $40.2 million, respectively. The increase in goodwill relates primarily to our final payment for the acquisition of Brandrud and the acquisition of certain elements of Ruskin Industries. We account for our goodwill in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 350 (ASC 350). Under ASC 350, we are required to perform an annual test on our goodwill, by reporting unit, to determine whether the asset values are impaired. A reporting unit is defined as an operating segment or one level below an operating segment. Substantially all of our goodwill is within the North American operating segment (see footnote 20), which has been determined to be made up of two reporting units. Pursuant to ASC 350, the annual goodwill test is comprised of two steps. The first step compares the fair value of the reporting unit with its carrying amount, including goodwill. The second step used to measure the amount of impairment loss compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the first step of the test is passed then goodwill is not considered impaired and the second step is unnecessary. If an impairment results from these tests, we are required to reduce the net carrying value of the assets to their estimated fair market value.
Our impairment-testing model is based partly on an income-based approach that considers the present value of projected cash flows and the resulting residual value and partly on a market-based approach that considers recent market capitalization values. In completing the test under this approach, we assume that one of the drivers of the value of a business today is the cash flows it will generate in the future. We also assume that such future cash flows can be reasonably estimated. While these projected cash flows reflect our best estimate of future reporting unit performance, actual cash flows could differ significantly. Historically, both of these approaches have passed the step one testing.
We performed our goodwill tests in the fourth quarter of fiscal 2009. Both the projected cash flows and the market-based approach tests passed the step-one tests by substantial margins for all reporting units, which indicates that our goodwill is not impaired. We employed a market-based approach in selecting the discount rates used in our analysis. By this, we mean the discount rates selected represent market
Mr. Rufus Decker
December 4, 2009
Page 4
rates of return equal to what we believe a reasonable investor would expect to achieve on investments of similar size to our reporting units. We believe the market participant based discount rates selected in our testing exceed the estimated weighted average cost of capital for our specific business as a whole. The results of the impairment test are sensitive to changes in discount rates, though the testing performed in fiscal 2009 would indicate that even a significant increase in the discount rate would not have changed the result.
Pension and Other Post-Retirement Benefits, page 34
3. If reasonably likely changes in the significant assumptions you discuss related to pension and other post-retirement benefits could have a material effect on your financial condition, operating performance, or liquidity, please disclose the estimated amount of the impact of these changes based on the range of reasonably likely outcomes. Refer to Section 501.14 of the Financial Reporting Codification for guidance.
Response:
Management will disclose the potential effects of changes in the significant assumptions related to pension benefits that reasonably could have a material effect on financial condition, operating performance or liquidity in future filings. This disclosure would take the form of a sensitivity analysis by significant assumption.
Please see the following example disclosure that Management would use if necessary.
Example Disclosure: Sensitivity Analysis
Changes in the discount rate and return on assets can have a significant effect on the expense or obligations related to our pension plans. We cannot predict these changes in discount rates or investment returns and, therefore, cannot reasonably estimate whether adjustments to our expense or obligation in subsequent years will be significant. Both the May XX, 2010 pension funded status and 2011 expense are affected by year-end 2010 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. The effect of the indicated increase/(decrease) in discount rates and expected return on assets is shown below:
In Millions
Assumption
1 Percent Change
2011 Expense
May XX, 2010 Obligation
U.S.
International
U.S.
International
Discount rate
+/- 1.0
$xx / (xx)
$xx / (xx)
$xx / (xx)
$xx / (xx)
Expected return on assets
+/- 1.0
$xx / (xx)
$xx / (xx)
$xx / (xx)
$xx / (xx)
Mr. Rufus Decker
December 4, 2009
Page 5
Management's Discussion and Analysis
Discussion of Business Segments – Fiscal 2009 Compared to Fiscal 2008, page 23
4. The "Other" category consists primarily of your North American Home and start-up businesses and certain unallocated corporate expenses. Other segment operating earnings (loss) is material to total operating earnings for the year ended May 30, 2009 and the interim period ended August 29, 2009. Please revise your segment MD&A to separately discuss with quantification business reasons for significant changes between periods in the operating earnings for the businesses included in other as well as corporate expenses.
Response:
Management agrees to separately discuss, with quantification, business reasons for significant changes between periods in the operating earnings for those businesses and corporate expenses included within the “Other” segment category. Please see example disclosure below.
Net sales within the “Other” segment category were $42 million in fiscal 2009 compared to $52 million in the prior year. The decrease is the result of net sales declining within our North American Home business, primarily due to the challenges associated with the U.S. macroeconomic environment. This overall decrease was somewhat offset by sales to a new retail customer. Operating losses within our “Other” segment category totaled $25.3 million for the year or (1.6) percent of net sales. This compares to income of $3.4 million or 0.2 percent of net sales in the prior year, a decrease of 180 basis points. Certain costs are not allocated between the three operating segments. Those costs that are determined to be the result of isolated business decisions are not subject to allocation and are evaluated separately from routine business operations. Restructuring expense is such a cost that has been allocated solely to the “Other” segment category in both fiscal 2009 and fiscal 2008, with $28.4 million and $5.1 million of restructuring expenses, respectively. The decline in operating in operating income is primarily attributable to the increase in restructuring expense and secondarily to the decline in net sales.
Financial Statements
Notes to the Financial Statements
Note 1. Significant Accounting and Reporting Policies, page 46
General
5. Your disclosures on page 33 indicate that you enter into arrangements to provide consideration to your customers. If you pay slotting fees, engage in cooperative advertising programs, have buydown programs, or make other payments to resellers, please disclose your accounting policy for each of these types of arrangements, including the statement of operations
Mr. Rufus Decker
December 4, 2009
Page 6
line item that each type of arrangement is included in. For each expense line item that includes these types of arrangements, please disclose the related amounts included in that line item. For each type of arrangement treated as an expense rather than as a reduction of revenues, please tell us how this type of arrangement meets the requirements in EITF 01-9. Please also discuss in MD&A any significant estimates resulting from these arrangements.
Response:
The Company does have programs whereby we provide consideration to our customers. Management agrees to disclose any significant programs and the accounting policy for such programs, including the related amounts for each expense line item. The Company engages in a cooperative advertising program that is treated as expense in the statement of operations. We have applied subtopic 605-50-45-2 in making this determination. As such, Management has determined that our cooperative advertising partners receive a separately identifiable benefit in return for consideration and that the fair value of the benefit received is equal to or exceeds the value of the consideration given.
Management agrees to discuss any significant estimates resulting from these arrangements in the MD&A section. Future filings will include disclosures substantially in accordance with the example below:
Example Disclosure: Customer Payments and Incentives
We offer various sales incentive programs to our customers, such as rebates, discounts, buy-downs and cooperative advertising programs. The company accounts for these programs in accordance with Accounting Standards Codification (ASC) subtopic 605-50 Customer Payments and Incentives. Consistent with this guidance, we have determined that programs such as rebates, discounts and buy-downs are adjustments to the selling price and are therefore characterized as a reduction to net sales. The cooperative advertising program, whereby customers are reimbursed for company approved advertising expenditures, provides us with an identifiable benefit from the advertisement at a verifiable market rate. Therefore, the cost of the cooperative advertising program is recognized as an operating expense and is included in the selling, general and administrative line in the statement of operations. As o