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. Refer also to the information provided under the heading "Forward-Looking Statements" in this Annual Report on Form 10-K.
Executive Overview
Herman Miller’s purpose statement is design for the good of humankind. 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.
Subsequent to the end of fiscal 2021, the Company finalized the acquisition of Knoll, Inc. (“Knoll”) in a cash and stock transaction valued at approximately $1.8 billion. This combination brings together two pioneering and iconic brands to create MillerKnoll, one of the largest and most influential modern design companies in the world. Together we will transform our industry and redefine modern design. With a broader portfolio, global footprint, and advanced digital capabilities, our combined company will be poised to innovate and design the future for all the places where life happens.
Herman Miller's products are sold internationally through controlled subsidiaries or branches in various countries including the United Kingdom, Denmark, Canada, Japan, 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, the Company's 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), HAY and Herman Miller 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 HAY brand, which was launched in North America in fiscal 2019.
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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 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 naughtone.
•International Contract — Includes the operations associated with the design, manufacture and sale of furniture products, primarily for work-related settings in EMEA, Latin America, and Asia-Pacific.
•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 eCommerce, direct mailing catalogs and Herman Miller, DWR and HAY stores and 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.
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, design 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, heal and play. Within the industries in which the Company operates, Herman Miller, DWR, Geiger, Maharam, POSH, Nemschoff, Colebrook Bosson Saunders ("CBS"), HAY, Maars Living 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.
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•Omni-Channel Reach - The Company has built a multi-channel distribution capability that it considers unique. Through contract furniture dealers, direct customer sales, retail stores and studios, eCommerce, 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 control 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 US federal government). In most of these instances, the Company contracts separately with a dealer or third-party installation company to provide sales-related services.
•Retail Studios - At the end of fiscal 2021 the Retail business unit included 45 retail studios (including 35 operating under the DWR brand, 4 under the HAY brand, 5 Herman Miller stores and a multi-brand Chicago store). This business also operates 3 outlet studios. The retail and outlet studios are located in metropolitan areas throughout North America.
•eCommerce - The Company sells products through its online stores, in which products are available for sale via the Company's website, hermanmiller.com, global eCommerce 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.
•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 eCommerce websites.
•Wholesale - Certain of the Company's products are sold on a wholesale basis to third-party retailers located in various markets around the world.
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.
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Areas of Strategic Focus
Despite a number of risks and challenges, the Company believes it is well positioned to successfully pursue its purpose of design for the good of humankind. 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.
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.
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Business Overview
The following is a summary of the significant events and items impacting the Company's operations for the year ended May 29, 2021:
•The Company entered into strategic agreements during the fiscal year, including agreements for (i) the acquisition of Knoll’s common stock for $11.00 per share in cash, without interest, and 0.32 shares of Herman Miller common stock for each outstanding share of Knoll common stock and (ii) the acquisition of all of the outstanding shares of Knoll's preferred stock for approximately $253 million in cash in the aggregate. This transaction was finalized subsequent to the end of the fiscal year.
•Net sales were $2,465.1 million, representing a decrease of 0.9% when compared to the prior year. The decrease in net sales was driven primarily by decreased sales volumes in the North America Contract segment, partially offset by increased demand with the Retail segment, the impact the acquisition of HAY and naughtone; and incremental list price increases, net of contract price discounting. On an organic basis, net sales were $2,345.3 million(*), representing a decrease of 5.7% when compared to the prior year.
•Gross margin was 38.5% as compared to 36.6% in the prior year. The increase in gross margin was driven primarily by favorable channel and product mix combined with incremental list price increases, partially offset by lower overhead leverage due to decreased volumes as well as an increase in commodity market prices.
•Operating expenses decreased by $230.5 million or 24.3% as compared to the prior year. Operating expenses in the prior year included non-cash impairment charges of $205 million. In the current year, operating expenses included acquisition and integration charges of $11.0 million, and restructuring costs of $2.7 million. Restructuring costs related mainly to severance and outplacement benefits associated with workforce reductions and profit improvement initiatives implemented during the previous year.
•The effective tax rate was 21.2% for fiscal 2021 compared to negative 44.9% for the prior year. Excluding the impact of adjustments related to restructuring and other special charges recorded, a portion of which were not deductible for tax purposes, the effective tax rate for the prior year was 19.9%(*). This rate reflected both provision to return adjustments and the accrual of withholding taxes related to planned repatriation of cash from certain foreign jurisdictions.
•Diluted earnings per share for the full year totaled $2.92 compared to a loss per share of $0.15 last year. On an adjusted basis, diluted earnings per share totaled $3.05(*) in fiscal 2021 compared to $2.61(*) in fiscal 2020, behind the strength of improved gross margins and well-managed operating expenses.
•The Company declared cash dividends of $0.56 per share compared to $0.63 per share in the prior year.
The following summary includes the Company's view on the economic environment in which it operates:
•The Company's Retail segment supports a range of furniture categories aimed at the home environment. Several of these categories, including Home Office, Upholstery, Outdoor, Storage, and Accessories, saw a ramp-up in demand during the first three quarters of fiscal 2021 and this continued into the fourth quarter of fiscal 2021.
•The disruption from the COVID-19 pandemic has adversely impacted our fiscal 2021 results as contract furniture industry order trends, as reported by the Business and Institutional Furniture Manufacturers Herman Miller, Inc. and Subsidiaries 25 Association ("BIFMA"), have highlighted near-term demand pressures from the slowdown in economic activity from the pandemic in our North America Contract segment. Our International Contract segment has also been impacted, although many of the markets internationally have shown signs of faster economic recovery.
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•The Company is monitoring the resolution of various trade policy negotiations between the U.S. and key trading partners as well as the post-Brexit impact on the U.K. and European Union. These negotiations create uncertainty in key markets, which, if unresolved in the near term, could negatively impact customer demand.
•The Company continues to navigate the impact of global tariffs. The Company believes, based upon existing circumstances, that pricing, strategic sourcing actions and profit optimization initiatives have fully offset the current level of tariffs imposed on imports from China.
•The Company's financial performance is sensitive to changes in certain input costs, including steel and steel component parts. The market price of steel in the fourth quarter of fiscal 2021 was higher than the same period of the prior year and negatively impacted consolidated results on a year-over-year basis. The price of steel unfavorably impacted consolidated gross margin in the fourth quarter of fiscal 2021. However, ongoing cost reduction initiatives and a planned price increase in the first quarter of fiscal 2022 will help offset these pressures over time.
The remaining sections of Item 7 include additional analysis of the fiscal year ended May 29, 2021, including discussion of significant variances compared to the prior year period. A detailed review of our fiscal 2020 performance compared to our fiscal 2019 performance is set forth in Part II, Item 7 of our Form 10-K for the fiscal year ended May 30, 2020.
(*) Non-GAAP measurements; see accompanying reconciliations and explanations.
COVID-19 Update
The Company continues to respond to the challenges brought about by the COVID-19 pandemic. Workplace restrictions are regionally applied based on the recommendations of local government and health authorities. While demand for the Company's products and services, particularly in the Contract channel of the business, has been adversely impacted, our multi-channel go-to-market approach has enabled us to serve customers where, and how, they need to be served. In addition, the investments we’ve made in people, technology, and products have positioned us well to capitalize on emerging opportunities as our customers' needs have changed throughout the COVID-19 crisis. This has allowed for our Retail business to take advantage of the unanticipated emerging work-from-home trend as well as "home is my castle" trends as consumers are focusing on and upgrading their broader home environments.
Employee Safety and Health
The health and well-being of employees remains top of mind. We are taking a regional approach to restrictions based on active COVID-19 case levels and local health authority recommendations. Contact tracing is active in all regions to help track and control the spread of the virus. We also continue to employ a variety of other safety measures including domestic and international travel restrictions, extensive cleaning protocols, temperature and health screenings, personal protective equipment, and visitor safety guidelines. We will be working with our employees around the globe to understand vaccine distribution and create time for every employee to be vaccinated if they wish to do so.
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Customer Focus
The digital investments we’ve made allowed us to pivot quickly and capitalize on a new set of opportunities when our customers’ purchasing behaviors changed. These investments include reimagined Design Within Reach and Herman Miller websites, a Work from Home landing page on Herman Miller’s website, a Work from Home online assessment tool, and new digital platforms that are creating greater efficiencies for contract and dealer audiences. The latest in a series of innovative solutions designed to accelerate growth in the Contract business is Herman Miller Professional – a digital ecosystem designed to meet customer demand for a simple and efficient design and product specification solution. Herman Miller Professional will deliver seamless online experiences to small- and medium sized businesses, a segment that has historically been underserved by the traditional contract furniture model, while also helping our dealers capture new clients and revenue. Businesses will be able to design their spaces with product from the Herman Miller family of brands, leverage an online quoting and purchasing process to complete their order, and select from several delivery options, including white glove service where appropriate. Our first Herman Miller retail seating concept stores are open in Los Angeles, New York Hudson Yards, Tokyo, Austin, Chicago Fulton Market, Century City Los Angeles and Greenwich, CT. In the early days, these stores have exceeded our initial revenue and operating profit expectations as we seek to educate customers about the health benefits of ergonomic seating. We remain uniquely positioned to serve our customers through multiple channels with the most comprehensive portfolio of products in the industry.
As our customers develop their post-pandemic work plans, there is a notable shift to work being done from a number of places, with the office as a destination – a place where employees want to be rather than are required to be. Herman Miller Group is ready to capture the many opportunities caused by this shift as our commercial customers rethink their real estate portfolios, redesign their workplaces, and seek to provide healthy and productive home work environments.
Manufacturing and Retail Operations
Manufacturing facilities continue to operate at near-normal capacity with enhanced safety precautions. All retail studios and stores are open in some capacity; with some open to the public and some open in limited capacity. All facilities operate within the context of and are subject to local guidance from government and health authorities and we will continue to adjust to ensure we are acting in accordance with these guidelines.
Cost Reductions
In fiscal 2020, the Company implemented a range of actions aimed at temporarily reducing costs and preserving liquidity. In fiscal 2021, the Company, together with its Board of Directors, made the decision to move forward with several restorative actions. This included eliminating the 10% reduction in compensation, the introduction of a modified bonus program and re-establishing a quarterly cash dividend program. In addition, the Company has reinstated the previously suspended employer-paid retirement plan contributions in the fourth quarter of fiscal 2021, and has also elected to make a catch-up contribution for the employer-paid retirement plan contributions that were suspended for a majority of fiscal 2021. Despite these various reinstatements, the Company continues to tightly control operating expenses in the face of lingering economic uncertainty.
Reconciliation of Non-GAAP Financial Measures
This report contains references to Organic net sales, Adjusted earnings per share - diluted, and adjusted effective tax rate which are non-GAAP financial measures. Organic Growth (Decline) represents the change in reported Net sales, excluding currency translation effects and the impact of acquisitions. Adjusted Earnings per Share represents reported diluted earnings per share excluding the impact from adjustments related to purchase accounting adjustments related to the HAY and naughtone investments, impairment charges, restructuring expenses and other special charges or gains, including related taxes. Restructuring expenses include actions involving facilities consolidation and optimization, targeted workforce reductions, and costs associated with an early retirement program. Special charges include certain costs arising as a direct result of COVID-19, and retroactive payments related to reinstated employee benefits. Retroactive payments related to reinstated employee benefits were an adjustment to Earnings per Share in fourth quarter, but not for the full year. Adjusted effective tax rate reflects both provision to return adjustments and the accrual of withholding taxes related to planned repatriation of cash from certain foreign jurisdictions.
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The Company believes presenting Organic net sales and Adjusted earnings per share - diluted is useful for investors as it provides financial information on a more comparative basis for the periods presented by excluding items that are not representative of the ongoing operations of the Company.
Organic net sales and Adjusted earnings per share - diluted are not measurements of our financial performance under GAAP and should not be considered as alternatives to the related GAAP measurement. These non-GAAP measurements have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Our presentation of non-GAAP measures should not be construed as an indication that our future results will be unaffected by unusual or infrequent items. We compensate for these limitations by providing prominence of our GAAP results and using the non-GAAP financial measures only as a supplement.
The following table reconciles Net sales to Organic net sales for the years ended as indicated below (in millions):
Proforma Adjustments
Currency Translation Effects (1) (1.8) (19.6) (0.5) (21.9) — — — —
(1) Currency translation effects represent the estimated net impact of translating current period sales using the average exchange rates applicable to the comparable prior year period
The following table reconciles EPS to Adjusted EPS for the years ended as of indicated below:
Earning (Loss) per Share - Diluted $ 2.92 $ (0.15)
Less: Gain on consolidation of equity method investments — (0.63)
Less: Gain on legal settlement, after tax (0.06) —
Add: Special charges, after tax 0.02 0.15
Add: Impairment charges, after tax — 2.90
Add: Acquisition and integration charges, after tax 0.15 —
Add: Restructuring expenses, after tax 0.02 0.34
Adjusted Earnings per Share - Diluted $ 3.05 $ 2.61
Note: The adjustments above are net of tax. For the twelve months ended May 29, 2021 and May 30, 2020, the tax impact of the adjustments were $0.01 and $0.62, respectively.
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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 2021 Fiscal 2020 % Change
Operating earnings (loss) 230.6 (38.4) n/a
Gain on consolidation of equity method investments — 36.2 n/a
Earnings (loss) before income taxes and equity income 226.4 (13.4) n/a
Income tax expense 47.9 6.0 n/a
Equity income from nonconsolidated affiliates, net of tax 0.3 5.0 (94.0) %
Net earnings (loss) 178.8 (14.4) n/a
Net earnings (loss) attributable to Herman Miller, Inc. $ 173.1 $ (9.1) n/a
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:
Operating (loss) earnings 9.4 (1.5)
Gain on consolidation of equity method investments — 1.5
Other expenses, net 0.2 0.5
Earnings (loss) before income taxes and equity income 9.2 (0.5)
Income tax expense 1.9 0.2
Equity income from nonconsolidated affiliates, net of tax — 0.2
Net earnings (loss) 7.3 (0.6)
Net earnings (loss) attributable to Herman Miller, Inc. 7.0 (0.4)
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Net Sales
The following chart presents graphically the primary drivers of the year-over-year change in Net sales. The amounts presented in the bar graph are expressed in millions and have been rounded.
Net sales decreased $21.5 million or 0.9% compared to the prior year fiscal period. The following items primarily contributed to the change:
•Increased sales volumes within the Retail segment of approximately $201 million and the International segment of approximately $65 million.
•Increase of approximately $98 million due to the acquisitions of HAY and naughtone.
•Incremental list price increases, net of contract price discounting, of approximately $17 million.
•Foreign currency translation had a favorable impact on net sales of approximately $22 million.
•Decreased sales volumes within the North America segment of approximately $425 million, primarily due to the impact of the COVID-19 pandemic.
Gross Margin
Gross margin was 38.5% for fiscal 2021 as compared to 36.6% for fiscal 2020. The following factors summarize the major drivers of the year-over-year change in gross margin percentage:
•A favorable shift in channel mix increased gross margin by approximately 80 basis points.
•Product mix, material performance and ongoing profitability improvement efforts increased gross margin by approximately 140 basis points.
•Incremental list price increases, net of contract price discounting, increased gross margin by approximately 40 basis points.
•Lower overhead leverage decreased gross margin by approximately 70 basis points.
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Operating Expenses
The following chart presents graphically the primary drivers of the year-over-year change in Operating expenses. The amounts presented in the bar graph are expressed in millions and have been rounded.
Operating expenses decreased by $230.5 million or 24.3% compared to the prior year fiscal period. The following factors contributed to the change:
•The acquisition of HAY and naughtone increased Operating expenses by approximately $23 million and charges related to the Knoll acquisition increased current year Operating expenses by approximately $11 million.
•IT costs increased approximately $4 million driven primarily by increased investments within the Company's digital and eCommerce platforms.
•Non-cash charges of $205 million in the prior year for the impairment of goodwill, intangible assets and right of use assets related to Design Within Reach, Maharam, HAY and naughtone.
•Restructuring expenses decreased by approximately $24 million, primarily related to voluntary and involuntary reductions in the Company's North American and International workforces that were substantially completed in the prior year.
•Lower marketing and selling expenses of approximately $16 million primarily within the North America Contract segment due to lower sales volume.
•Travel costs were approximately $14 million lower due to decreased travel as a result of COVID-19.
•Lower warranty expense of approximately $9 million. Decreased warranty costs were due to lower sales volumes and claims experience within the North America Contract segment.
Other Income/Expense
Net other expenses for fiscal 2021 was $4.2 million compared to $11.2 million in fiscal 2020. The change was primarily the result of favorable legal settlements of approximately $4.3 million in fiscal 2021.
Income Taxes
See Note 11 of the Consolidated Financial Statements for additional information.
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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. The segments identified by the Company include North America Contract, International Contract, Retail and Corporate. For descriptions of each segment, refer to Note 14 of the Consolidated Financial Statements.
The charts below present the relative mix of Net sales and Operating earnings across each of the Company's segments. This is followed by a discussion of the Company's results, by segment.
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North America Contract ("North America")
(Dollars in millions) Fiscal 2021 Fiscal 2020 Change
Operating earnings % 6.2 % 8.2 % (2.0) %
Net sales decreased 25.3%, or 26.1%(*) on an organic basis, over the prior year due to:
•Decreased sales volumes within the North America segment of approximately $424.5 million, primarily due to the outbreak of COVID-19; offset by
•Incremental list price increases, net of discounting, of approximately $7.9 million
•Approximately $10.6 million due to the acquisition of naughtone; and
•The impact of foreign currency translation which increased sales by approximately $1.8 million.
Operating earnings decreased $56.8 million, or 43.4%, over the prior year due to:
•Decreased gross margin of $167.2 million due to decreased sales volumes as well as a decrease in gross margin percentage of 170 basis points. The decrease in gross margin percentage was due primarily to lower overhead and labor leverage offset in part by lower overhead spend; offset by
•Decrease in operating expenses of $110.4 million. This reduction was driven by lower marketing and selling expenses of approximately $15 million, lower travel costs of approximately $8 million, lower warranty costs of approximately $9 million and lower restructuring expenses of $14.9 million.
International Contract ("International")
(Dollars in millions) Fiscal 2021 Fiscal 2020 Change
Net sales increased 33.1%, or 11.8%(*) on an organic basis, over the prior year due to:
•Approximately $87 million due to the acquisition of HAY and naughtone
•Increased sales volumes within the International segment of approximately $64.9 million, primarily driven by growth within the Asia-Pacific and EMEA regions. These regions benefited from a relatively early recovery to the COVID pandemic and associated return to the office.
•The impact of foreign currency translation which increased sales by approximately $19.6 million; offset by
•Incremental discounting, net of list price increases, of approximately $5.6 million.
Operating earnings increased $74.8 million, or 411.0%, compared to the prior year due to:
•Increased gross margin of $70.4 million due to the increase in sales explained above, and increased gross margin percentage of 220 basis points due primarily to favorable changes in channel and product mix.; and
•Decreased operating expenses of $4.4 million driven primarily by the prior year non-cash charge of $23.2 million for the impairment of intangible assets related to HAY and naughtone. This was offset in part by increased operating expenses related to the acquisition of Hay and naughtone.
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Retail
(Dollars in millions) Fiscal 2021 Fiscal 2020 Change
Net sales increased 56.1% as reported and 56.0% on an organic(*) basis, over the prior year due to:
•Increased sales volumes of approximately $201.0 million which were driven by increased demand across multiple product categories, with the largest increase relating to workplace furnishings; and
•Incremental price increases, net of discounting, of approximately $15.0 million.
Operating earnings increased $265.5 million over the prior year due to:
•Increased gross margin of $135.3 million due to the increase in sales explained above, as well as an increased gross margin percentage of 740 basis points due primarily to changes in channel and product mix and the impact of incremental price increases; and
•Decreased operating expenses of $130.2 million were driven primarily by non-cash charges recorded in the prior year of 139.0 million related to the impairment of goodwill, intangible assets and right of use assets held by DWR. This was offset in part by increased investment in digital and eCommerce capabilities, the initial rollout of Herman Miller-branded seating stores, and increased variable selling expenses and incentives.
Corporate
Corporate unallocated expenses totaled $53.7 million for fiscal 2021, an increase of $14.5 million from fiscal 2020. The increase was driven primarily by $11.0 million of acquisition and integration costs associated with the Knoll acquisition that was finalized subsequent to the close of fiscal 2021.
(*) Non-GAAP measurements; see accompanying reconciliations and explanations.
Liquidity and Capital Resources
The table below summarizes the net change in cash and cash equivalents for the fiscal years indicated.
Fiscal Year Ended
Cash provided by (used in):
Investing activities $ (59.9) $ (168.1)
Effect of exchange rate changes $ 17.7 $ (2.9)
Net change in cash and cash equivalents $ (57.6) $ 294.8
Cash Flow — Operating Activities
Cash provided by operating activities in fiscal 2021 was $332.3 million compared to $221.8 million in the prior year. The increase in cash generated from operations in the current year, compared to the prior year, was primarily due to:
•Prior year net earnings included a non-taxable non-cash gain on consolidation of an equity method investment of $36.2 million as well as a non-cash impact of $205.4 of impairment charges; and
•Restructuring expenses of $2.7 million compared to $26.4 million in the prior year; and
•An increase in current assets primarily driven by an increase in accounts receivable of $14.8 million in the current year compared to a decrease of $68.6 million in the prior year. The increase in accounts receivable is primarily due to timing and increase in sales at the end of fiscal 2021 compared to fiscal 2020; and
Herman Miller, Inc. and Subsidiaries36
•An increase in current liabilities driven by the following:
◦Increase in accounts payable of $43.2 million in the current year compared to a decrease of $59.5 million in the prior year which was a result of timing and greater production in fiscal 2021 compared to fiscal 2020 due to manufacturing shut downs in the prior year; and
◦Increase in accrued liabilities of $15.1 million in the current year compared to a decrease of $32.0 million in the prior year driven by increases in compensation in the current year offset by a decrease in accrued vacation.
Cash Flow — Investing Activities
Cash used in investing activities in fiscal 2021 totaled $59.9 million compared to $168.1 million in the prior year. The decrease in cash outflow in the current year, compared to the prior year, was primarily a result of the following:
•Prior year cash outflows of $111.2 million for the additional investments in naughtone and HAY; and
•A decrease in capital expenditures of $9.2 million due to reduced spending as a result of COVID-19; and
•Proceeds from the sale of the Company's manufacturing facility in China and the office facility in the United Kingdom in the current year of $14.0 million.
At the end of the fiscal 2021, there were outstanding commitments for capital purchases of $46.5 million. The Company plans to fund these commitments with cash on hand and/or cash generated from operations. The Company expects capital spending in fiscal 2022 to be between $140 million and $150 million, which will be primarily related to investments in the Company's facilities and equipment along with the inclusion of Knoll in fiscal year 2022.
Cash Flow — Financing Activities
Cash used in financing activities was $347.7 million in fiscal 2021 as compared to cash provided by financing activities of $244.0 million in fiscal 2020. The items below represent the major factors driving the year-over-year increase in cash flow used in financing activities:
•During the first quarter of fiscal 2021 the Company paid down the $265.0 million draw on its syndicated revolving line of credit that was taken in the fourth quarter of fiscal 2020. Additionally, in the fourth quarter of fiscal 2021, the Company repaid $50.0 million of private placement notes that were due March 1, 2021; and
•Lower employer-benefit related stock issuances in the current year. The Company issued $5.0 million in common stock related to these programs during the current fiscal year compared to $15.6 million in fiscal 2020; offset in part by
•Common stock repurchased of $0.9 million in the current year compared to $26.6 million in the prior year; and
•The prior year purchase of the remaining Herman Miller Consumer Holdings, Inc. redeemable noncontrolling interests for $20.3 million.
Sources of Liquidity
In addition to steps taken to protect its workforce and manage business operations, the Company has taken actions to safeguard its capital position in the current environment. The Company is closely managing spending levels, capital investments, and working capital, and has temporarily suspended open market share repurchase activity as part of managing cash flows.
At the end of fiscal 2021, the Company had a well-positioned balance sheet and liquidity profile. 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, refer to Note 6 to the Consolidated Financial Statements.
Cash and cash equivalents $ 396.4 $ 454.0
Marketable securities $ 7.7 $ 7.0
Availability under revolving lines of credit $ 265.2 $ 0.6
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Of the cash and cash equivalents noted above at the end of fiscal 2021, the Company had $213.7 million of cash and cash equivalents held outside the United States. In addition, the Company had marketable securities of $7.7 million held by one of its international wholly-owned subsidiaries.
The Company’s syndicated revolving line of credit, which expires on August 28, 2024, provides the Company with up to $500 million in revolving variable interest borrowing capacity and includes an "accordion feature" allowing the Company to increase, at its option and subject to the approval of the participating banks, the aggregate borrowing capacity of the facility by up to $250 million. Outstanding borrowings bear interest at rates based on the prime rate, federal funds rate, LIBOR or negotiated rates as outlined in the agreement. Interest is payable periodically throughout the period if borrowings are outstanding.
As of May 29, 2021, the total debt outstanding related to borrowings under the syndicated revolving line of credit was $225.0 million with available borrowings against this facility of $265.2 million.
The subsidiary holding the Company's marketable securities is taxed as a United States taxpayer at the Company's election. Consequently, for tax purposes, all United States tax impacts for this subsidiary have been recorded. The Company intends to repatriate $107.0 million in cash held in certain foreign jurisdictions and as such has recorded a deferred tax liability related to foreign withholding taxes on these future dividends received in the U.S. from foreign subsidiaries of $0.7 million. The Company intends to remain indefinitely reinvested in the remaining undistributed earnings outside the U.S.
The Company believes that its financial resources are adequate to provide for its operations for at least the next 12 months and will allow it to manage the impact of COVID-19 on the Company's business operations for the foreseeable future. The Company will continue to evaluate its financial position in light of future developments, particularly those relating to COVID-19 and the Knoll acquisition.
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. Refer to Note 13 of the Consolidated Financial Statements for more information relating to contingencies.
Basis of Presentation
The Company's fiscal year ends on the Saturday closest to May 31. The fiscal years ended May 29, 2021, May 30, 2020 and June 1, 2019 contained 52 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
Short-term borrowings and long-term debt (1) $ 277.1 $ 2.2 $ — $ 225.0 $ 49.9
Stockholder dividends (4) 11.1 11.1 — — —
Herman Miller, Inc. and Subsidiaries38
(1) Includes the current portion of long-term debt. Contractual cash payments on long-term debt obligations are disclosed herein based on the amounts borrowed as of May 29, 2021 and 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 May 29, 2021. Actual cash outflows may differ significantly due to changes in borrowings or 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 May 29, 2021, the total projected benefit obligation for our domestic and international employee pension benefit plans was $141.9 million.
(4) Represents the dividend payable as of May 29, 2021. 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.
Other Future Obligations
The Company entered into strategic agreements during the fiscal year, including agreements for (i) the acquisition of Knoll’s common stock for $11.00 per share in cash, without interest, and 0.32 shares of Herman Miller common stock for each outstanding share of Knoll common stock and (ii) the acquisition of all of the outstanding shares of Knoll's preferred stock for approximately $253 million in cash in the aggregate. This transaction was finalized subsequent to the end of the fiscal year. The transaction was funded with a combination of new debt, as discussed in Note 19 of the Consolidated Financial Statements, and cash on our balance sheet.
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.
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. The following is a summary of our more significant accounting policies that require the use of estimates and judgments in preparing the financial statements.
Business Combinations
We allocate the fair value of purchase consideration to tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is allocated to goodwill. The allocation of the purchase consideration requires management to make significant estimates and assumptions, especially with respect to intangible assets. These estimates are reviewed with our advisors and can include, but are not limited to, future expected cash flows related to acquired customer relationships, trademarks and know-how/designs and require estimation of discount rates and royalty rates. As such, our estimates of fair value are based upon reasonable assumptions but which are inherently uncertain and unpredictable, and as a result, actual results may differ from these estimates. During the measurement period, which is up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings. During 2020, management considered the acquisition of HAY a material acquisition. There were no other material acquisitions during fiscal 2020 or 2021; however, the acquisition of Knoll, which closed subsequent to year end is a material acquisition. See Note 3 to the Consolidated Financial Statements for more information.
Goodwill and Indefinite-lived Intangibles
We perform our annual impairment assessment for goodwill and other indefinite-lived intangible assets each year as of March 31 or more frequently if events or changes in circumstances indicate an impairment maybe possible. We may
392021 Annual Report
consider qualitative factors to assess if it is more likely than not that the fair value for goodwill or indefinite-lived intangible assets is below the carrying amount. We may also elect to bypass the qualitative assessment and perform a quantitative assessment.
To complete the impairment assessment the Company makes estimates about fair value by using a weighting of the income and the market approach. The income approach is based on projected discounted cash flows using a market participant discount rate. The market approach is based on financial multiples of companies comparable to each reporting unit and applies a control premium. We corroborate the fair value through a market capitalization reconciliation to determine if the implied control premium is reasonable based on the qualitative considerations, such as recent market transactions.
The Company believes its assumptions for assessing the impairment of its long-lived assets, goodwill and indefinite-lived trade names are reasonable, but future changes in the underlying assumptions could occur due to the inherent uncertainty in making such estimates.
Further declines in the Company’s operating results due to challenging economic conditions, an unfavorable industry or macroeconomic development or other adverse changes in market conditions could change one of the key assumptions the Company uses to calculate the fair value of its long-lived assets, goodwill and indefinite-lived trade names, which could result in a further decline in fair value and require the Company to record an impairment charge in future periods.
Goodwill
Certain business acquisitions have resulted in the recording of goodwill. At May 29, 2021 and May 30, 2020, we had goodwill of $364.2 million and $346.0 million, respectively.
We perform our annual impairment assessment for goodwill and other indefinite-lived intangible assets as of March 31 or more frequently if events or changes in circumstances indicate that the asset might be impaired. We may consider qualitative factors to assess if it is more likely than not that the fair value for goodwill is below the carrying amount, however, we may also elect to bypass the qualitative assessment and perform a quantitative assessment. Each of the reporting units were reviewed for impairment using a quantitative assessment. In performing the quantitative impairment test for fiscal year 2021, the Company determined that the fair value of its reporting units exceeded the carrying amount and, as such, these reporting units were not impaired. In fiscal 2020, the Company recorded $125.5 million in goodwill impairment charges related to both the Retail and Maharam reportable segments.
The Company adopted and applied ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" using the prospective method in fiscal 2020. Refer to Note 1 of the Consolidated Financial Statements for further information regarding the adoption of ASU No. 2017-04.
To estimate the fair value of each reporting unit when performing quantitative testing, the Company utilizes a weighting of the income approach and the market method. These approaches are based on a discounted cash flow analysis and observable comparable company information that use several inputs, including:
•actual and forecasted revenue growth rates and operating margins,
•discount rates based on the reporting unit's weighted average cost of capital, and
•revenue and EBITDA of comparable companies
The Company corroborates the reasonableness of the inputs and outcomes of our discounted cash flow analysis through a market capitalization reconciliation to determine whether the implied control premium is reasonable.
Generally, changes in estimates of expected future cash flows would have a similar effect on the estimated fair value of the reporting unit. For example, a 1.0% decrease in estimated annual future cash flows would decrease the estimated fair value of the reporting unit by approximately 1.0%. The estimated long-term growth rate can have a significant impact on the estimated future cash flows, and therefore, the fair value of each reporting unit. Of the other key assumptions that impact the estimated fair values, most reporting units have the greatest sensitivity to changes in the estimated discount rate. In completing the annual goodwill impairment test, the respective fair values were estimated using discount rates ranging from 12.0% to 14.0% and long-term growth rates ranging from 2.5% to 3.0%.
Herman Miller, Inc. and Subsidiaries40
Indefinite-lived Intangible Assets
Certain business acquisitions have resulted in the recording of trade names as indefinite-lived intangible assets, which are not amortized. At May 29, 2021 and May 30, 2020, we had trade name assets with a carrying value of $97.6 million and $92.8 million, respectively.
The Company evaluates indefinite-lived trade name intangible assets for impairment annually. The Company also tests for impairment if events and circumstances indicate that it is more likely than not that the fair value of an indefinite-lived intangible asset is below its carrying amount. An impairment charge is recorded if the carrying amount of an indefinite-lived intangible asset exceeds the estimated fair value on the measurement date. During fiscal 2020, the Company adjusted the carrying value of all its tradenames to fair value, and as a result recognized $53.3 million in non-cash impairment charges on its indefinite-lived trade names.
In fiscal 2021, the Company performed quantitative assessments in testing indefinite-lived intangible assets for impairment. In performing this assessment, we estimate the fair value of these intangible assets using the relief-from-royalty method which requires assumptions related to:
•actual and forecasted revenue growth rates,
•assumed royalty rates that could be payable if we did not own the trademark, and
•a market participant discount rate based on a weighted-average cost of capital.
The assumptions above reflect management’s best estimate; however, actual results could differ from our estimates. If the estimated fair value of the indefinite-lived intangible asset is less than its carrying value, we would recognize an impairment charge.
In the table below, the Company has summarized the carrying values and fair values of each of the Company’s indefinite-lived trade names:
(In millions)
Trade name Segment Carrying Value Fair Value
Maharam North America Contract $ 16.5 $ 20.2
HAY International Contract 43.1 43.8
naughtone International Contract 6.5 10.9
In completing our annual indefinite-lived trade name impairment test, the respective fair values were estimated using discount rates ranging from 12.0% to 14.0%, royalty rates ranging from 2.00% to 3.00% and long-term growth rates ranging from 2.5% to 3.0%. The Company’s estimates of the fair value of its HAY indefinite-lived intangible asset is sensitive to changes in the key assumptions above as well as projected financial performance. Therefore, a sensitivity analysis was performed on certain key assumptions.
Keeping all other assumptions constant, a 10% decrease in forecasted revenue growth rates at May 29, 2021 would have the following effects on the fair value of the HAY trade name:
(In millions)
Trade name Segment 10% Decrease
HAY International Contract $ (4.3)
Keeping all other assumptions constant, a 100 basis point change in the discount rate at May 29,2021 would have the following effects on the fair value of the HAY trade name:
(In millions)
Trade name Segment 100 bps Increase 100 bps Decrease
HAY International Contract $ (3.9) $ 4.8
Keeping all other assumptions constant, a 50 basis point change in the royalty rate at May 29, 2021 would have the following effects on the fair value of the HAY trade name:
412021 Annual Report
(In millions)
Trade name Segment 50 bps Increase 50 bps Decrease
HAY International Contract $ 8.8 $ (8.7)
Keeping all other assumptions constant, a 50 basis point change in the long-term growth rate at May 29, 2021 would have the following effects on the fair value of the HAY trade name:
(In millions)
Trade name Segment 50 bps Increase 50 bps Decrease
HAY International Contract $ 1.7 $ (1.5)
If the estimated cash flows related to the Company's indefinite-lived intangibles were to decline in future periods, the Company may need to record an impairment charge.
Long-lived Assets
The Company evaluates other long-lived assets and acquired business units for indicators of impairment when events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. If such indicators are present, the future undiscounted cash flows attributable to the asset group are compared to the carrying value of the asset or asset group. 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.
The Company believes its assumptions for assessing the impairment of its long-lived assets, goodwill and indefinite-lived trade names are reasonable, but if actual results are not consistent with management's estimates and assumptions, a material impairment charge could occur, which could have a material adverse effect on our consolidated financial statements.
New Accounting Standards
Refer to Note 1 of the Consolidated Financial Statements for information related to new accounting standards.
Forward Looking Statements
This report 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,” "could," and “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, our success in initiatives aimed at achieving long-term profit optimization goals;
•statements regarding the acquisition of Knoll, including the anticipated benefits of the acquisition, the anticipated impact of the acquisition on the combined company’s business and future financial and operating results, and the expected amount and timing of synergies that might be realized from the acquisition;
•the effect of the acquisition of Knoll on our ability of Herman Miller to retain and hire key personnel and maintain relationships with customers, suppliers and others with whom we do business, or on our operating results and business generally;
•risks that the acquisition of Knoll disrupts current plans and operations and the potential difficulties in employee retention as a result of the transaction;
•the outcome of any legal proceedings related to the acquisition of Knoll;
•our ability to successfully integrate Knoll’s operations;
Herman Miller, Inc. and Subsidiaries42
•our ability to implement our plans, forecasts and other expectations with respect to our business after the acquisition of Knoll and realize expected synergies;
•business disruptions following the acquisition of Knoll;
•the ability to realize the anticipated benefits of the acquisition of Knoll, including the possibility that the expected benefits from the transaction will not be realized within the expected time period;
•the amount of the costs, fees, expenses and charges related to the merger agreement, the preferred stock purchase agreement, and the transactions contemplated by each agreement;
•unknown liabilities;
•the impact of foreign currency exchange rate and interest rate fluctuations on Herman Miller’s or Knoll’s results;
•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, changes in future tax legislation or interpretation of current tax legislation;
•the ability to increase prices to absorb the additional costs of raw materials;
•changes in global tariff regulations;
•the financial strength of our and Knoll’s dealers and the financial strength of our and Knoll’s customers;
•our ability to locate new retail studios, negotiate favorable lease terms for new and existing locations and implement 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;
•our ability to integrate and benefit from acquisitions and investments;
•the pace and level of government procurement;
•the outcome of pending litigation or governmental audits or investigations;
•political risk in the markets we serve;
•natural disasters, public health crises, disease outbreaks; and
•other risks identified in our filings with the SEC.
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.
432021 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 $0.9 million during fiscal 2021 compared to the prior year. The impact from changes in commodity prices lowered the Company's costs by approximately $4 million during fiscal 2020 as compared to fiscal 2019. 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.
Shortages and disruption in the steel industry as a result of the COVID-19 pandemic negatively impacted the availability of steel. While this reduction in availability has not had a significant impact on our ability to produce and deliver products to our customers, it has negatively impacted the cost of procuring steel. Significant increases in raw materials can be difficult to offset with price increases due to existing contractual agreements with customers as well as difficulty finding effective financial instruments to hedge these changes. In the short term, our gross margin could be negatively impacted by significant increases in these costs. Our profitability could be negatively impacted in the long term if we are not able to pass along these higher raw material costs to our customers.
Foreign Exchange Risk
The Company primarily manufactures its products in the United States, United Kingdom, China, India, and Brazil. 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 May 29, 2021, the Company had outstanding sixteen forward currency instruments designed to offset either net asset or net liability exposure that is denominated in non-functional currencies.
Herman Miller, Inc. and Subsidiaries44
(In millions, except number of forward contracts)
Net Asset Exposure
Currency Number of Forward Contracts Net Exposure
Net Liability Exposure
Currency Number of Forward Contracts Net Exposure
As of May 30, 2020, the Company had outstanding, twenty forward currency instruments designed to offset either net asset or net liability exposure that is denominated in non-functional currencies.
(In millions, except number of forward contracts)
Net Asset Exposure
Currency Number of Forward Contracts Net Exposure
Net Liability Exposure
Currency Number of Forward Contracts Net Exposure
The cost of the foreign currency hedges and remeasuring all foreign currency transactions into the appropriate functional currency resulted in a net gain of $0.8 million in fiscal 2021 in contrast to net loss of $1.1 million in fiscal 2020 included in net earnings. These amounts are included in “Other (income) expense, net” 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 increased the accumulated comprehensive loss component of total stockholders' equity by $52.1 million compared to a decrease of $7.7 million as of the end of fiscal 2021 and 2020, 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 agreements is used to measure interest to be paid or received and does not represent the amount of exposure to credit loss. The differential paid or received on the interest rate swap agreements is recognized as an adjustment to interest expense.
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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.
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 additional 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 $14.4 million at May 29, 2021 compared to $25.0 million at May 30, 2020. All cash flows related to the Company's interest rate swap instruments are denominated in U.S. dollars. For further information, refer to Note 6 and Note 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.
Long-Term Debt - Fixed rate:
Interest rate 4.95% $ — $ — $ — $ — $ — $ 49.9 $ 49.9
Interest rate 2.387%(2) $ — $ — $ — $ 75.0 $ — $ — $ 75.0
(1) Amount does not include the recorded fair value of the swap instruments.
(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.
Herman Miller, Inc. and Subsidiaries46
Item 8 Financial Statements and Supplementary Data
Herman Miller, Inc.
Consolidated Statements of Comprehensive Income
Year Ended
Operating expenses:
Impairment charges — 205.4 —
Gain on consolidation of equity method investments — 36.2 —
Interest and other investment income (2.1) (2.3) (2.1)
Other (income) expense, net (7.6) 1.0 (1.6)
Earnings (loss) before income taxes and equity income 226.4 (13.4) 195.1
Equity earnings from nonconsolidated affiliates, net of tax 0.3 5.0 5.0
Net earnings (loss) attributable to Herman Miller, Inc. $ 173.1 $ (9.1) $ 160.5
Earnings (loss) per share — basic $ 2.94 $ (0.15) $ 2.72
Earnings (loss) per share — diluted $ 2.92 $ (0.15) $ 2.70
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments $ 52.1 $ (7.7) $ (14.2)
Pension and post-retirement liability adjustments 8.8 (14.2) (7.8)
Unrealized gains (losses) on interest rate swap agreement 8.1 (18.0) (12.3)
Unrealized holding (losses) gains on securities (0.1) 0.1 —
Total other comprehensive income (loss), net of tax 68.9 (39.8) (34.3)
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Herman Miller, Inc.
Consolidated Balance Sheets
(In millions, except share and per share data) May 29, 2021 May 30, 2020
ASSETS
Current Assets:
Cash and cash equivalents $ 396.4 $ 454.0
Short-term investments 7.7 7.0
Accounts receivable, net of allowances of $5.5 and $4.7 204.7 180.0
Unbilled accounts receivable 16.4 19.5
Other current assets 7.6 16.0
Indefinite-lived intangibles 97.6 92.8
Other noncurrent assets 61.5 60.9
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS & STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings and current portion of long-term debt 2.2 51.4
Accrued compensation and benefits 90.2 71.1
Pension and post-retirement benefits 34.5 42.4
Redeemable noncontrolling interests 77.0 50.4
Stockholders' Equity:
Preferred stock, no par value (10,000,000 shares authorized, none issued) — —
Additional paid-in capital 94.7 81.6
Accumulated other comprehensive loss (65.1) (134.0)
Deferred compensation plan (0.2) (0.3)
Herman Miller, Inc. Stockholders' Equity 849.6 643.0
Herman Miller, Inc. and Subsidiaries48
Herman Miller, Inc.
Consolidated Statements of Stockholders' Equity
(In millions, except share and per share data) Shares Amount
Other comprehensive loss, net of tax — — — — (34.3) — (34.3) — (34.3)
Stock-based compensation expense — — 8.4 — — — 8.4 (0.2) 8.2
Restricted and performance stock units released 468,807 0.1 0.2 — — — 0.3 — 0.3
Employee stock purchase plan issuances 62,957 — 1.9 — — — 1.9 — 1.9
Deferred compensation plan — — — — — (0.1) (0.1) — (0.1)
Dividends declared ($0.79 per share) — — — (46.6) — — (46.6) — (46.6)
Cumulative effect of accounting changes — — — 0.5 1.4 — 1.9 — 1.9
Net loss — — — (9.1) — — (9.1) — (9.1)
Other comprehensive loss — — — — (39.8) — (39.8) — (39.8)
Stock-based compensation expense — — 2.7 — — — 2.7 — 2.7
Restricted and performance stock units released 138,590 — 0.2 — — — 0.2 — 0.2
Employee stock purchase plan issuances 70,145 — 2.1 — — — 2.1 — 2.1
Deferred compensation plan — — (0.3) — — 0.5 0.2 — 0.2
Dividends declared ($0.63 per share) — — — (37.5) — — (37.5) — (37.5)
Redemption value adjustment — — — 17.8 — — 17.8 — 17.8
Other comprehensive income — — — — 68.9 — 68.9 — 68.9
Stock-based compensation expense — — 9.0 — — — 9.0 — 9.0
Restricted and performance stock units released 114,103 — 0.2 — — — 0.2 — 0.2
Employee stock purchase plan issuances 71,468 — 2.1 — — — 2.1 — 2.1
Repurchase and retirement of common stock (38,932) — (0.9) — — — (0.9) — (0.9)
Deferred compensation plan — — — — — 0.1 0.1 — 0.1
Dividends declared ($0.56 per share) — — — (33.4) — — (33.4) — (33.4)
Redemption value adjustment — — — (15.0) — — (15.0) — (15.0)
Other — — — (0.2) — — (0.2) — (0.2)
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Herman Miller, Inc.
Consolidated Statements of Cash Flows
Year Ended
Cash Flows from Operating Activities:
Investment fair value adjustment — — (2.1)
Gain on consolidation of equity method investments — (36.2) —
Pension contributions (5.4) (0.9) (0.9)
Pension and post-retirement expenses 3.0 1.6 1.2
Impairment charges — 205.4 —
Stock-based compensation 9.0 2.7 7.3
Decrease (increase) in long-term assets 1.2 (4.7) (0.4)
Increase in long-term liabilities 16.0 5.8 1.6
Changes in current assets and liabilities:
Increase (decrease) in inventories (8.5) 6.0 (31.9)
Increase in prepaid expenses and other (3.9) (2.2) (0.6)
Increase (decrease) in accounts payable 43.2 (59.5) 0.5
Increase (decrease) in accrued liabilities 15.1 (32.0) 22.7
Cash Flows from Investing Activities:
Marketable securities purchases (5.9) (3.1) (1.9)
Marketable securities sales 5.3 5.0 1.7
Proceeds from sales of property and dealers 14.0 0.2 0.5
Purchase of HAY licensing agreement — — (4.8)
Acquisitions, net of cash received — (111.2) —
Equity investment in non-controlled entities — (3.3) (73.6)
Net Cash Used in Investing Activities (59.9) (168.1) (165.0)
Cash Flows from Financing Activities:
Borrowings of long-term debt — 50.0 —
Repayments of long-term debt (50.0) — —
Proceeds from credit facility — 265.0 —
Repayments of credit facility (265.0) — —
Common stock repurchased and retired (0.9) (26.6) (47.9)
Purchase of redeemable noncontrolling interests — (20.3) (10.1)
Net Cash (Used in) Provided by Financing Activities (347.7) 244.0 (91.9)
Effect of exchange rate changes on cash and cash equivalents 17.7 (2.9) (4.2)
Net (Decrease) Increase In Cash and Cash Equivalents (57.6) 294.8 (44.7)
Cash and cash equivalents, Beginning of Year 454.0 159.2 203.9
Other Cash Flow Information
Income taxes paid, net of cash received $15.8 $39.6 $41.0
Herman Miller, Inc. and Subsidiaries50
Notes to the Consolidated Financial Statements
Note 1 Significant Accounting and Reporting Policies 52
Note 2 Revenue from Contracts with Customers 61
Note 3 Acquisitions and Divestitures 63
Note 4 Inventories 65
Note 5 Investments in Nonconsolidated Affiliates 66
Note 6 Short-Term Borrowings and Long-Term Debt 67
Note 7 Leases 69
Note 8 Employee Benefit Plans 71
Note 9 Common Stock and Per Share Information 74
Note 10 Stock-Based Compensation 75
Note 11 Income Taxes 79
Note 12 Fair Value 83
Note 13 Commitments and Contingencies 88
Note 14 Operating Segments 89
Note 15 Accumulated Other Comprehensive Loss 92
Note 16 Restructuring Expenses 92
Note 17 Variable Interest Entities 94
Note 18 Quarterly Financial Data (Unaudited) 94
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1. Significant Accounting and Reporting Policies
The following is a summary of significant accounting and reporting policies not reflected elsewhere in the accompanying financial statements.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of Herman Miller, Inc. and its controlled domestic and foreign subsidiaries. The consolidated entities are collectively referred to as “the Company.” All intercompany accounts and transactions have been eliminated in the Consolidated Financial Statements.
Description of Business
The Company researches, designs, manufactures, sells and distributes interior furnishings for use in various environments including office, healthcare, educational and residential settings and provides related services that support companies all over the world. The Company's products are sold primarily through independent contract office furniture dealers as well as the following channels: owned contract office furniture dealership, direct customer sales, independent retailers, owned retail studios, direct-mail catalogs and the Company's eCommerce platforms.
Fiscal Year
The Company's fiscal year ends on the Saturday closest to May 31. The fiscal years ended May 29, 2021, May 30, 2020, and June 1, 2019 contained 52 weeks.
Foreign Currency Translation
The functional currency for most of the foreign subsidiaries is their local currency. The cumulative effects of translating the balance sheet accounts from the functional currency into the United States dollar using fiscal year-end exchange rates and translating revenue and expense accounts using average exchange rates for the period are reflected as a component of Accumulated other comprehensive loss in the Consolidated Balance Sheets.
The financial statement impact of gains and losses resulting from remeasuring foreign currency transactions into the appropriate functional currency resulted in a net gain of $0.8 million, net loss of $1.1 million, and a net gain of $0.3 million for the fiscal years ended May 29, 2021, May 30, 2020, and June 1, 2019, respectively. These amounts are included in “Other (income) expense, net” in the Consolidated Statements of Comprehensive Income.
Cash Equivalents
The Company holds cash equivalents as part of its cash management function. Cash equivalents include money market funds and time deposit investments with original maturities of less than three months. The carrying value of cash equivalents, which approximates fair value, totaled $229.8 million and $364.0 million as of May 29, 2021 and May 30, 2020, respectively. All cash equivalents are high-credit quality financial instruments and the amount of credit exposure to any one financial institution or instrument is limited.
Marketable Securities
The Company maintains a portfolio of marketable securities primarily comprised of mutual funds. These mutual funds are comprised of both equity and fixed income funds. These investments are held by the Company's wholly owned insurance captive and have been recorded at fair value based on quoted market prices. Net unrealized holding gains or losses related to the equity mutual funds are recorded through net income while net unrealized holding gains or losses related to the fixed income mutual funds are recorded through other comprehensive income.
All marketable security transactions are recognized on the trade date. Realized gains and losses are included in “Interest and other investment income” in the Consolidated Statements of Comprehensive Income. See Note 12 of the Consolidated Financial Statements for additional disclosures of marketable securities.
Allowances for Credit Losses
Allowances for credit losses related to accounts are managed at a level considered by management to be adequate to absorb an estimate of probable future losses existing at the balance sheet date.
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In estimating probable losses, we review accounts based on known customer exposures, historical credit experience, and specific identification of other potentially uncollectible accounts. An accounts receivable balance is considered past due when payment is not received within the stated terms. Accounts that are considered to have higher credit risk are reviewed using information available about the debtor, such as financial statements, news reports and published credit ratings. General information regarding industry trends, the economic environment is used as well.
We arrive at an estimated loss for specific concerns and estimate an additional amount for the remainder of trade balances based on historical trends and other factors previously referenced. Balances are written off against the reserve once the Company determines the probability of collection to be remote. The Company generally does not require collateral or other security on trade accounts receivable. Subsequent recoveries, if any, are credited to bad debt expense when received.
Concentrations of Credit Risk
The Company's trade receivables are primarily due from independent dealers who, in turn, carry receivables from their customers. The Company monitors and manages the credit risk associated with individual dealers and direct customers where applicable. Dealers are responsible for assessing and assuming credit risk of their customers and may require their customers to provide deposits, letters of credit or other credit enhancement measures. Some sales contracts are structured such that the customer payment or obligation is direct to the Company. In those cases, the Company may assume the credit risk. Whether from dealers or customers, the Company's trade credit exposures are not concentrated with any particular entity.
Inventories
Inventories are valued at the lower of cost or market and include material, labor and overhead. Inventory cost is determined using the last-in, first-out (LIFO) method at manufacturing facilities in Michigan, whereas inventories of the Company's other locations are valued using the first-in, first-out (FIFO) method. The Company establishes reserves for excess and obsolete inventory based on prevailing circumstances and judgment for consideration of current events, such as economic conditions, that may affect inventory. The reserve required to record inventory at lower of cost or net realizable value may be adjusted in response to changing conditions. Further information on the Company's recorded inventory balances can be found in Note 4 of the Consolidated Financial Statements.
Goodwill and Indefinite-lived Intangible Assets
Goodwill and other indefinite-lived assets included in the Consolidated Balance Sheets consist of the following:
Foreign currency translation adjustments (0.9) (0.5) (1.4)
Foreign currency translation adjustments 18.2 4.8 23.0
Goodwill is tested for impairment at the reporting unit level annually, or more frequently, when events or changes in circumstances indicate that the fair value of a reporting unit has more likely than not declined below its carrying value. When testing goodwill for impairment, the Company may first assess qualitative factors. If an initial qualitative assessment identifies that it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value, additional quantitative testing is performed. The Company may also elect to bypass the qualitative testing and proceed directly to the quantitative testing. If the quantitative testing indicates that goodwill is impaired, the carrying value of goodwill is written down to fair value. Each of the reporting units were reviewed for impairment using a quantitative assessment as of March 31, 2021.
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To estimate the fair value of each reporting unit when performing quantitative testing, the Company utilizes a weighting of the income approach and the market method. These approaches are based on a discounted cash flow analysis and observable comparable company information that use several inputs, including:
•actual and forecasted revenue growth rates and operating margins,
•discount rates based on the reporting unit's weighted average cost of capital, and
•revenue and EBITDA of comparable companies
The Company corroborates the reasonableness of the inputs and outcomes of our discounted cash flow analysis through a market capitalization reconciliation to determine whether the implied control premium is reasonable.
The Company completed its annual goodwill impairment test in the fourth quarter of the year, as of March 31st. In fiscal 2021, the Company elected to perform quantitative impairment tests for all goodwill reporting units and other indefinite-lived intangible assets. 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.
In completing our annual goodwill impairment test, the respective fair values were estimated using an income approach with market participant discount rates ranging from 12.0% to 14.0% developed using a weighted average cost of capital analysis and long-term growth rates ranging from 2.5% to 3.0%.
Intangible assets with indefinite useful lives are not subject to amortization and are evaluated annually for impairment, or more frequently, when events or changes in circumstances indicate that the fair value of an intangible asset may not be recoverable. The Company utilizes the relief from royalty methodology to test for impairment. The primary assumptions for the relief from royalty method include forecasted revenue growth rates, royalty rates and discount rates. The Company measures and records an impairment loss for the excess of the carrying value of the asset over its fair value.
In fiscal 2021, the Company performed quantitative assessments in testing indefinite-lived intangible assets for impairment. The carrying value of the Company's HAY trade name indefinite-lived intangible asset was $41.7 million as of March 31, 2021. The calculated fair value of the HAY trade name was $43.8 million which represents an excess fair value of $2.1 million or 5.0%. If the residual cash flow related to this trade name were to decline in future periods, the Company may need to record an impairment charge.
In completing our annual indefinite-lived trade name impairment test, the respective fair values were estimated using a relief-from-royalty approach, applying market participant discount rates ranging from 12.0% to 14.0% developed using a weighted average cost of capital analysis, royalty rates ranging from 2.0% to 3.0% and long-term growth rates ranging from 2.5% to 3.0%.
The table below summarizes the carrying values as of May 29, 2021, for each of the Company’s indefinite-lived trade names:
(In millions)
Trade name Carrying Value
naughtone 6.5
During fiscal 2020, the Company recognized $205.4 million of impairment charges related to goodwill, indefinite-lived intangible assets and long-lived assets. These charges are included in "Impairment charges" within the Consolidated Statements of Comprehensive Income.
Property, Equipment and Depreciation
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Property and equipment are stated at cost. The cost is depreciated over the estimated useful lives of the assets using the straight-line method. Estimated useful lives range from 3 to 10 years for machinery and equipment and do not exceed 40 years for buildings. Leasehold improvements are depreciated over the lesser of the lease term or the useful life of the asset. The Company capitalizes certain costs incurred in connection with the development, testing and installation of software for internal use and cloud computing arrangements. Software for internal use is included in property and equipment and is depreciated over an estimated useful life not exceeding 5 years. Depreciation and amortization expense is included in the Consolidated Statements of Comprehensive Income in the Cost of sales, Selling, general and administrative and Design and research line items.
The following table summarizes our property as of the dates indicated:
Land and improvements $ 25.2 $ 23.7
Construction in progress 27.6 29.2
Property and equipment, net $ 327.2 $ 330.8
As of the end of fiscal 2021, outstanding commitments for future capital purchases approximated $46.5 million.
Other Long-Lived Assets
The Company reviews the carrying value of long–lived assets for impairment when events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. If such indicators are present, the future undiscounted cash flows attributable to the asset or asset group are compared to the carrying value of the asset or asset group. If such assets are considered to be impaired, the impairment amount to be recognized is the amount by which the carrying value of the assets exceeds their fair value.
Amortizable intangible assets within Other amortizable intangibles, net in the Consolidated Balance Sheets consist primarily of patents, trademarks and customer relationships. The customer relationships intangible asset is comprised of relationships with customers, specifiers, networks, dealers and distributors. Refer to the following table for the combined gross carrying value and accumulated amortization for these amortizable intangibles.
(In millions) Patent and Trademarks Customer Relationships Other Total
Patent and Trademarks Customer Relationships Other Total
The Company amortizes these assets over their remaining useful lives using the straight-line method over periods ranging from 5 years to 20 years, or on an accelerated basis, to reflect the expected realization of the economic benefits. It is estimated that the weighted-average remaining useful life of the patents and trademarks is approximately 6 and the weighted-average remaining useful life of the customer relationships is 7 years.
Estimated amortization expense on existing amortizable intangible assets as of May 29, 2021, for each of the succeeding five fiscal years, is as follows:
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(In millions)
Self-Insurance
The Company is partially self-insured for general liability, workers' compensation and certain employee health and dental benefits under insurance arrangements that provide for third-party coverage of claims exceeding the Company's loss retention levels. The Company's health benefit and auto liability retention levels do not include an aggregate stop loss policy. The Company's retention levels designated within significant insurance arrangements as ofMay 29, 2021, 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
The Company accrues for its self-insurance arrangements, as well as reserves for health, prescription drugs, and dental benefit exposures based on actuarially-determined estimates, which are recorded in “Other liabilities” in the Consolidated Balance Sheets. The value of the liability as of May 29, 2021 and May 30, 2020 was $12.3 million and $13.1 million, respectively. The actuarial valuations are based on historical information along with certain assumptions about future events. Changes in assumptions for such matters as legal actions, medical costs, payment lag times and changes in actual experience could cause these estimates to change. The general, auto, and workers' compensation liabilities are managed through the Company's wholly-owned insurance captive.
Research, Development and Other Related Costs
Research, development, pre-production and start-up costs are expensed as incurred. Research and development ("R&D") costs consist of expenditures incurred during the course of planned research and investigation aimed at discovery of new knowledge useful in developing new products or processes. R&D costs also include the enhancement of existing products or production processes and the implementation of such through design, testing of product alternatives or construction of prototypes. R&D costs included in “Design and research” expense in the accompanying Consolidated Statements of Comprehensive Income are $50.8 million, $54.3 million and $58.8 million, in fiscal 2021, 2020, and 2019, respectively.
Royalty payments made to designers of the Company's products as the products are sold are variable costs based on product sales. These expenses totaled $21.3 million, $19.7 million and $18.1 million in fiscal years 2021, 2020 and 2019 respectively. They are included in Design and research expense in the accompanying Consolidated Statements of Comprehensive Income.
Customer Payments and Incentives
We offer various sales incentive programs to our customers, such as rebates and discounts. Programs such as rebates and discounts are adjustments to the selling price and are therefore characterized as a reduction to net sales.
Herman Miller, Inc. and Subsidiaries56
Revenue Recognition
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 recognized at the point in time when control transfers, generally upon transfer of title and risk of loss to the customer. Revenue for services, including the installation of products by the Company's owned dealers, is recognized over time as the services are provided. The method of revenue recognition may vary, depending on the type of contract with the customer, as noted in the section "Disaggregated Revenue" in Note 2 of the Consolidated Financial Statements.
The Company's contracts with customers include master agreements and certain other forms of contracts, which do not reach the level of a performance obligation until a purchase order is received from a customer. At the point in time that a purchase order under a contract is received by the Company, the collective group of documents represent an enforceable contract between the Company and the customer. While certain customer contracts may have a duration of greater than a year, all purchase orders are less than a year in duration. As of May 29, 2021, all unfulfilled performance obligations are expected to be fulfilled in the next twelve months.
Variable consideration exists within certain contracts that the Company has with customers. When variable consideration is present in a contract with a customer, the Company estimates the amount that should be included in the transaction price utilizing either the expected value method or the most likely amount method, depending on the nature of the variable consideration. These estimates are primarily related to rebate programs which involve estimating future sales amounts and rebate percentages to use in the determination of transaction price. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Adjustments to Net sales from changes in variable consideration related to performance obligations completed in previous periods are not material to the Company's financial statements. Also, the Company has no contracts with significant financing components.
The Company accounts for shipping and handling activities as fulfillment activities and these costs are accrued within Cost of sales at the same time revenue is recognized. The Company does not record revenue for sales tax, value added tax or other taxes that are collected on behalf of government entities. The Company’s revenue is recorded net of these taxes as they are passed through to the relevant government entities. The Company has recognized incremental costs to obtain a contract as an expense when incurred as the amortization period is less than one year. The Company has not adjusted the amount of consideration to be received for any significant financing components as the Company’s contracts have a duration of one year or less.
Leases
The Company adopted ASC 842 - Leases at the beginning of fiscal year 2020. The new standard required the Company to recognize most leases on the balance sheet as right of use (ROU) assets with corresponding lease liabilities. All necessary changes required by the new standard, including those to the Company’s accounting policies, business processes, systems, controls and disclosures, were implemented as of the first quarter of fiscal year 2020. See Note 7 of the Consolidated Financial Statements for further information regarding the Company's lease accounting policies.
Cost of Sales
The Company includes material, labor and overhead in cost of sales. Included within these categories are items such as freight charges, warehousing costs, internal transfer costs and other costs of its distribution network.
Selling, General and Administrative
The Company includes costs not directly related to the manufacturing of its products in the Selling, general and administrative line item within the Consolidated Statements of Comprehensive Income. Included in these expenses are items such as compensation expense, rental expense, warranty expense and travel and entertainment expense.
Income Taxes
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Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse.
The Company's annual effective tax rate is based on income, statutory tax rates and tax planning strategies available in the various jurisdictions the Company operates. Complex tax laws can be subject to different interpretations by the Company and the respective government authorities. Significant judgment is required in evaluating tax positions and determining our tax expense. Tax positions are reviewed quarterly and tax assets and liabilities are adjusted as new information becomes available.
In evaluating the Company's ability to recover deferred tax assets within the jurisdiction from which they arise, the Company considers all positive and negative evidence. These assumptions require significant judgment about forecasts of future taxable income.
Stock-Based Compensation
The Company has several stock-based compensation plans, which are described in Note 10 of the Consolidated Financial Statements. Our policy is to expense stock-based compensation using the fair-value based method of accounting for all awards granted.
Earnings per Share
Basic earnings per share (EPS) excludes the dilutive effect of common shares that could potentially be issued, due to the exercise of stock options or the vesting of restricted shares and is computed by dividing net earnings by the weighted-average number of common shares outstanding for the period. Diluted EPS is computed by dividing net earnings by the sum of the weighted-average number of shares outstanding, plus all dilutive shares that could potentially be issued. When in a loss position, basic and diluted EPS use the same weighted-average number of shares outstanding. Refer to Note 9 of the Consolidated Financial Statements for further information regarding the computation of EPS.
Comprehensive Income
Comprehensive income consists of Net earnings, Foreign currency translation adjustments, Unrealized holding gains on securities, Unrealized gains on interest rate swap agreement and Pension and post-retirement liability adjustments. Refer to Note 15 of the Consolidated Financial Statements for further information regarding comprehensive income.