Herman Miller, Inc.
10-K on 07/28/2020   Download
SEC Document
SEC Filing
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 30, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-15141
__________________________________________
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HERMAN MILLER, INC.
(Exact name of registrant as specified in its charter)
__________________________________________
Michigan
 
38-0837640
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
855 East Main Avenue, Zeeland, MI 49464
(Address of principal executive offices and zip code)
(616) 654-3000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
MLHR
NASDAQ
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes      No  o 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  o    No   
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  o 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  o 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
o
Non-accelerated filer  
o
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     Yes   No  
The aggregate market value of the voting stock held by “nonaffiliates” of the registrant (for this purpose only, the affiliates of the registrant have been assumed to be the executive officers and directors of the registrant and their associates) as of November 30, 2019, was $2.8 million (based on $47.78 per share which was the closing sale price as reported by NASDAQ). As of July 22, 2020, Herman Miller, Inc. had 58,866,863 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders expected to be held on October 12, 2020, are incorporated by reference into Part III of this report.





Herman Miller, Inc.
Annual Report on Form 10-K
Table of Contents
 
Page No.
Part I
 
Item 1 Business
Item 1A Risk Factors
Item 1B Unresolved Staff Comments
Item 2 Properties
Item 3 Legal Proceedings
Additional Item: Executive Officers of the Registrant
Item 4 Mine Safety Disclosures
Part II
 
Item 5 Market for the Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Item 6 Selected Financial Data
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A Quantitative and Qualitative Disclosures about Market Risk
Item 8 Financial Statements and Supplementary Data
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
Item 9A Controls and Procedures
Item 9B Other Information
Part III
 
Item 10 Directors, Executive Officers, and Corporate Governance
Item 11 Executive Compensation
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13 Certain Relationships and Related Transactions, and Director Independence
Item 14 Principal Accountant Fees and Services
Part IV
 
Item 15 Exhibits and Financial Statement Schedule
Exhibit Index
Schedule II Valuation and Qualifying Accounts
Item 16 Form 10-K Summary
Signatures





PART I
Item 1 Business
General Development of Business
Herman Miller's mission statement is Inspiring Designs to Help People Do Great Things. To this end, the Company researches, designs, manufactures and distributes interior furnishings for use in various environments including office, healthcare, educational and residential settings and provides related services that support organizations and individuals all over the world. Through research, the Company seeks to understand, define and clarify customer needs and problems existing in its markets and to design products, systems and services that serve as innovative solutions to those needs and problems. The Company's products are sold primarily through the following channels: Owned and independent contract furniture dealers, direct customer sales, owned and independent retailers, direct-mail catalogs and the Company's e-commerce platforms.

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Herman Miller, Inc. and Subsidiaries 2


The Company was incorporated in Michigan in 1905. As the global design leader in our market, we established Herman Miller Group, a family of brands that collectively offers a variety of products for environments where people live, learn, work, heal and play. The family of brands includes Herman Miller®, Design Within Reach®, Geiger®, Maharam®, Nemschoff®, Colebrook Bosson Saunders®, naughtone®, Maars® Living Walls and HAY®. All of these companies are considered controlled subsidiaries, except for Maars of which the Company owns 48.2% of as of May 30, 2020. Herman Miller's corporate offices are located at 855 East Main Avenue, PO Box 302, Zeeland, Michigan, 49464-0302 and its telephone number is (616) 654-3000. Unless otherwise noted or indicated by the context, all references to "Herman Miller," "we," "our," "Company" and similar references are to Herman Miller, Inc. and its controlled subsidiaries. Further information relating to principles of consolidation is provided in Note 1 to the Consolidated Financial Statements included in Item 8 of this report.

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Financial Information about Segments
Information relating to segments is provided in Note 14 to the Consolidated Financial Statements included in Item 8 of this report.

Narrative Description of Business
The Company's principal business consists of the research, design, manufacture, selling and distribution of seating products, office furniture systems, other freestanding furniture elements, textiles, home furnishings and related services.

The Company's ingenuity and design excellence create award-winning products and services, which have made the Company a leader in the design and development of furniture, furniture systems, textiles and technology solutions. This leadership is exemplified by the innovative concepts introduced by the Company in its broad array of seating products (including Embody®, Aeron®, Mirra2™, Setu®, Sayl®, Verus®, Cosm®, Lino®, Verus®, Celle®, Equa®,

3 2020 Annual Report



Taper™ and Ergon® office chairs) and modular systems (including Canvas Office Landscape®, Locale®, Public Office Landscape®, Layout Studio®, Action Office®, Ethospace®, Arras®, Prospect®, Overlay™ and Resolve®). The Company also offers storage (including Meridian® and Tu® products), wood casegoods (including Geiger® products), freestanding furniture products (including Abak™, Intent®, Sense™ and Envelop®), healthcare products (including Palisade™, Compass™, Nala®, Ava® and other Nemschoff® products), the Thrive portfolio of ergonomic solutions, ergonomic and technology support products (including Colebrook Bosson Saunders® products) and the textiles of Maharam Fabric Corporation (Maharam®). The Live Platform™ system of cloud-connected furnishings, applications and dashboards provides data-enabled solutions for the Company's customers.

The Company also offers products for residential settings, including Eames®, Eames (lounge chair configuration)®, Eames (management chair configuration)®, Eames Soft Pad™, HAY®, Nelson™ basic cabinet series, Nelson™ end table, Nelson™ lanterns, Nelson™ marshmallow sofa, Nelson™ miniature chests, Nelson™ platform bench, Nelson™ swag leg group, Nelson™ tray table, Bubble Lamps®, Airia™, Ardea®, Bumper™, Burdick Group™, Everywhere™ tables, Claw™, Caper®, Distil™, Envelope™, Formwork®, Full Round™, H Frame™, I Beam™, Landmark™, Logic Mini™, Logic Power Access Solutions™, Renew™, Rolled Arm™, Scissor™, Sled™, Soft Pad™, Swoop™, Tone™, Twist™, Ward Bennett™ and Wireframe™. The Company also offers residential and ancillary products through its subsidiaries, including: the Line Storage Collection, Lina Swivel Chair, Matera Bedroom Collection, Emmy Sofa Collection, Story Bookcase and Sømmer Outdoor Collection for Design Within Reach®; the Always Lounge Chair, Always Chair, Polly Chair, Viv Chair, and Hush Chair for naughtone®; and the Mags Sofa and About A Chair Collections for HAY®.

The Company's products are marketed worldwide by its own sales staff, independent dealers and retailers, its owned dealers, via its e-commerce websites and through its owned Design Within Reach ("DWR") and HAY retail studios. Salespeople work with dealers, the architecture and design community, and directly with end-users. Independent dealerships concentrate on the sale of Herman Miller Group products and some complementary product lines of other manufacturers. It is estimated that approximately 70 percent of the Company's sales in the fiscal year ended May 30, 2020, were made to or through independent dealers. The remaining sales were made directly to end-users, including federal, state and local governments and several business organizations by the Company's own sales staff, its owned dealer network, its retail channels or independent retailers.

The Company is a recognized leader within its industry for the use, development and integration of customer-centered technologies that enhance the reliability, speed and efficiency of our customers' operations. This includes proprietary sales tools, interior design and product specification software; order entry and manufacturing scheduling and production systems; and direct connectivity to the Company's suppliers.

The Company's furniture systems, seating, freestanding furniture, storage, casegood and textile products, and related services are used in (1) institutional environments including offices and related conference, lobby, and lounge areas and general public areas including transportation terminals; (2) health/science environments including hospitals, clinics and other healthcare facilities; (3) industrial and educational settings; and (4) residential and other environments.

Raw Materials
The Company's manufacturing materials are available from a significant number of sources within North America, South America, Europe and Asia. To date, the Company experienced limited disruptions during the fourth quarter of fiscal 2020 as result of the COVID-19 pandemic in its supply chain, but subsequently has not experienced any difficulties in obtaining its raw materials. The costs of certain direct materials used in the Company's manufacturing and assembly operations are sensitive to shifts in commodity market prices. In particular, the costs of steel, plastic, aluminum components and particleboard are sensitive to the market prices of commodities such as raw steel, aluminum, crude oil, lumber and resins. Increases in the market prices for these commodities can have an adverse impact on the Company's profitability. Further information regarding the impact of direct material costs on the Company's financial results is provided in Management's Discussion and Analysis in Item 7 of this report, "Management's Discussion and Analysis of Financial Condition and Results of Operations”.


Herman Miller, Inc. and Subsidiaries 4


Patents, Trademarks, Licenses, Etc.
The Company has active utility and design patents in the United States. Many of the inventions covered by these patents also have been patented in a number of foreign countries. Various trademarks, including the name and stylized “Herman Miller” and the “Herman Miller Circled Symbolic M” trademark are registered in the United States and many foreign countries. The Company does not believe that any material part of its business depends on the continued availability of any one or all of its patents or trademarks, or that its business would be materially and adversely affected by the loss of any such marks, except for the following trademarks: Herman Miller®, Herman Miller Circled Symbolic M®, Maharam®, Geiger®, Design Within Reach®, DWR®, HAY®, naughtone®, Nemschoff®, Action Office®, Aeron®, Mirra®, Embody®, Setu®, Sayl®, Cosm®, Caper®, Eames®, Eames Lounge & Ottoman Configurations, Eames Aluminum Group Configuration, and Canvas Office Landscape®.

Working Capital Practices
Information concerning the Company's working capital levels relative to its sales volume can be found under the Executive Overview section in Item 7 of this report, “Management's Discussion and Analysis of Financial Condition and Results of Operations”. Beyond this discussion, the Company does not believe that it or the industry in general has any special practices or special conditions affecting working capital items that are significant for understanding the Company's business.

Customer Base
The Company estimates that no single dealer accounted for more than 4 percent of the Company's net sales in the fiscal year ended May 30, 2020. The Company estimates that the largest single end-user customer accounted for $122.9 million, $129.6 million and $109.8 million of the Company's net sales in fiscal 2020, 2019, and 2018, respectively. This represents approximately 5 percent of the Company's net sales in fiscal 2020, 2019 and 2018. The Company's 10 largest customers in the aggregate accounted for approximately 18 percent, 18 percent, and 19 percent of net sales in fiscal 2020, 2019, and 2018, respectively.

Backlog of Unfilled Orders
As of May 30, 2020, the Company's backlog of unfilled orders was $470.8 million. At June 1, 2019, the Company's backlog totaled $394.2 million. The increase in backlog in the current year was primarily due to delays in processing customer orders in the fourth quarter of fiscal 2020 caused by the outbreak of COVID-19 and related facility shut-downs. It is expected that substantially all the orders forming the backlog at May 30, 2020, will be filled during the next fiscal year. Many orders received by the Company are reflected in the backlog for only a short period while other orders specify delayed shipments and are carried in the backlog for up to one year. Accordingly, the amount of the backlog at any particular time does not necessarily indicate the level of net sales for a particular succeeding period.

Government Contracts
Other than standard provisions contained in contracts with the United States Government, the Company does not believe that any significant portion of its business is subject to material renegotiation of profits or termination of contracts or subcontracts at the election of various government entities. The Company sells to the U.S. Government both through a General Services Administration ("GSA") Multiple Award Schedule Contract and through competitive bids. The GSA Multiple Award Schedule Contract pricing is principally based upon the Company's commercial price list in effect when the contract is initiated, rather than being determined on a cost-plus-basis. The Company is required to receive GSA approval to apply list price increases during the term of the Multiple Award Schedule Contract period.

Competition
All aspects of the Company's business are highly competitive. From an office furniture perspective, the Company competes largely on design, product and service quality, speed of delivery and product pricing. Although the Company is one of the largest office furniture manufacturers in the world, it competes with manufacturers that have significant resources and sales as well as many smaller companies. The Company's most significant competitors are Haworth, HNI Corporation, Kimball International, Knoll and Steelcase.

The Company also competes in the home furnishings industry, primarily against national, regional and independent home furnishings retailers who market high-craft furniture to end-user customers and the interior design community.

5 2020 Annual Report



These competitors include companies such as Crate & Barrel Holdings, Inc., Hive Modern, Restoration Hardware, Room & Board, Wayfair and Williams-Sonoma, Inc. Similar to its office furniture product offerings, the Company competes primarily on design, product and service quality, speed of delivery and product pricing in this market.

Research, Design and Development
The Company believes it draws great competitive strength from its research, design and development programs. Through research, the Company seeks to understand, define and clarify customer needs and problems they are trying to solve. The Company designs innovative products and services that address customer needs and solve their problems. The Company uses both internal and independent research resources and independent design resources. Exclusive of royalty payments, the Company spent approximately $54.3 million, $58.8 million and $57.1 million on research and development activities in fiscal 2020, 2019 and 2018, respectively. Generally, royalties are paid to designers of the Company's products as the products are sold and are included in the Design and Research line item within the Consolidated Statements of Comprehensive Income.

Environmental Matters
Respecting the environment has been more than good business practice for the Company - it is the right thing to do. The Company’s commitment to the planet is embedded in its corporate strategy and will continue to develop as the Company outlines next steps in its sustainability strategy. As part of this commitment, the Company focuses on operating its global footprint with minimal impact on the environment and designing products with materials and processes that are safe for both people and the planet. Based on current facts known to management, the Company does not believe that existing environmental laws and regulations have had or will have any material effect upon the capital expenditures, earnings or competitive position of the Company. However, there can be no assurance that environmental legislation will not result in or require material capital expenditures or additional costs to our manufacturing process.

Human Resources
The Company considers its employees to be another of its major competitive strengths. The Company stresses individual employee participation and incentives, believing that this emphasis has helped attract and retain a competent and motivated workforce. The Company's human resources group provides employee recruitment, education and development, as well as compensation planning and counseling. Additionally, there have been no work stoppages or labor disputes in the Company's history. As of May 30, 2020, approximately 3 percent of the Company's employees are covered by collective bargaining agreements, most of whom are employees of its Nemschoff and Herman Miller Holdings Limited subsidiaries.

As of May 30, 2020, the Company had approximately 7,600 employees, representing a 5 percent decrease as compared with June 1, 2019. In addition to its employee workforce, the Company uses temporary labor to meet fluctuating demand in its manufacturing operations.

Information about International Operations
The Company's sales in international markets are made primarily to office/institutional customers. Foreign sales consist mostly of office furniture products such as Aeron®, Mirra®, Sayl®, Setu®, Layout Studio®, Imagine Desking System®, Ratio®, Cosm®, and other seating and storage products and ergonomic accessories such as the Flo® monitor arm. The Company conducts business in the following major international markets: Europe, the Middle East, Africa, Latin America and the Asia/Pacific region.

The Company's products currently sold in international markets are manufactured primarily by wholly owned subsidiaries in the United States, the United Kingdom, China, Brazil and India. A portion of the Company's products sold internationally are also manufactured by third-party suppliers. Sales are made through wholly owned subsidiaries or branches in Canada, the United Kingdom, Denmark, Korea, Mexico, Australia, Singapore, China (including Hong Kong), India and Brazil. The Company's products are offered in Canada, Europe, the Middle East, Africa, Latin America and the Asia/Pacific region primarily through dealers.


Herman Miller, Inc. and Subsidiaries 6


Additional information with respect to operations by geographic area appears in Note 14 of the Consolidated Financial Statements included in Item 8 of this report. Fluctuating exchange rates and factors beyond the control of the Company, such as tariff and foreign economic policies, may affect future results of international operations. Refer to Item 7A, Quantitative and Qualitative Disclosures about Market Risk, for further discussion regarding the Company's foreign exchange risk.

Available Information
The Company's annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are made available free of charge through the “Investors” section of the Company's internet website at www.hermanmiller.com, as soon as practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (SEC). The Company's filings with the SEC are also available for the public to read via the SEC's internet website at www.sec.gov. You may read and copy any materials we file with the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

Item 1A Risk Factors
The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones we face; others, either unforeseen or currently deemed less significant, may also have a negative impact on our Company. If any of the following occurs, our business, operating results, cash flows, and financial condition could be materially adversely affected.

We may not be successful in implementing and managing our growth strategy.
We have established a growth strategy for the business based on a changing and evolving world. Through this strategy we are focused on taking advantage of the changing composition of the office floor plate, the greater desire for customization from our customers, new technologies and trends towards urbanization and working from home.
 
To that end, we intend to grow in certain targeted ways. First, we will unlock the power of One Herman Miller by building an agile, collaborative, globally-connected organization fit for continuous evolution. This will also include simplifying and tailoring our go-to-market approach, as well as continuing to lead in product innovation across all businesses. Second, we intend to build a customer-centric, digitally enabled business model by leveraging our deep understanding of customer journeys to deliver inspired products and frictionless customer experiences. Inclusive of this will be to drive step-change in our data, analytics, marketing, and brand capabilities, as well as to strengthen our core technology backbone. Third, we intend to accelerate profitable growth by strengthening and evolving our core contract business, driving outsized growth in our international business and expanding our retail business. Finally, we believe it is a business imperative to reinforce our commitment to our people, planet and communities in a more integrated way than ever before. Beyond simply being the right thing to do, we are confident that elevating our focus on positive social and environmental business practices will beneficially impact our customers and enhance returns for our shareholders over the long term. Refer to the "Executive Overview" section within Item 7 for further discussion of our areas of strategic focus.

While we have confidence that our strategic plan reflects opportunities that are appropriate and achievable and that we have anticipated and will manage the associated risks, there is the possibility that the strategy may not deliver the projected results due to inadequate execution, incorrect assumptions, sub-optimal resource allocation, or changing customer requirements.
 
To meet these goals, we believe we will be required to continually invest in the research, design and development of new products and services, and there is no assurance that such investments will have commercially successful results.
 
Certain growth opportunities may require us to invest in acquisitions, alliances and the startup of new business ventures. These investments, if available, may not perform according to plan and may involve the assumption of business, operational or other risks that are new to our business.
 

7 2020 Annual Report



Future efforts to expand our business within developing economies, particularly within China and India, may expose us to the effects of political and economic instability. Such instability may impact our ability to compete for business. It may also put the availability and/or value of our capital investments within these regions at risk. These expansion efforts expose us to operating environments with complex, changing and in some cases, inconsistently-applied legal and regulatory requirements. Developing knowledge and understanding of these requirements poses a significant challenge and failure to remain compliant with them could limit our ability to continue doing business in these locations.
 
Pursuing our strategic plan in new and adjacent markets, as well as within developing economies, will require us to find effective new channels of distribution. There is no assurance that we can develop or otherwise identify these channels of distribution.

Disease outbreaks, such as the COVID-19 pandemic, could have an adverse impact on the Company's operations and financial results.
From time to time, various disease outbreaks may adversely impact our business, consolidated results of operations and financial condition, such as the current COVID-19 pandemic which has had such an adverse impact. The Company has global manufacturing facilities, suppliers, dealers and customers. Therefore, COVID-19, as well as measures taken by governmental authorities and other organizations and individuals to limit the spread of this virus, may interfere with the ability of our employees, suppliers and other business providers to carry out their assigned tasks or supply materials at ordinary levels of performance relative to the conduct of our business. In addition, the COVID-19 pandemic has caused a significant percentage of the traditional office workforce to work away from their office location. It is reasonable to assume, at least in the near-term, that this will have an adverse impact on the demand for office furniture and related products. This has caused, and may continue to cause, us to materially curtail certain of our business operations, and has had and could continue to have, a material adverse effect on our results of operations and cash flow.

Tariffs imposed by the U.S. government could have a material adverse effect on our results of operations.
The imposition of tariffs by the U.S. government on various products imported from certain countries, as well as countering tariffs on the export of U.S. goods, has and will likely continue to adversely impact the cost of certain of our raw materials and finished goods as well as products that we export to other countries. Accordingly, these tariffs and the possibility of broader trade conflicts stemming from the tariffs could negatively impact our business in the future. The tariffs on imports, most notably imports from China, also impacted the cost of steel in fiscal year 2020, a key commodity that we consume in producing products. Given the significance of steel costs to our direct materials costs, we are closely monitoring escalating trade tensions between the U.S. and China. The potential impact to our direct material costs due to tariffs on Chinese imports is somewhat limited, however, as purchases of direct materials (mainly component parts and products manufactured by third parties) from China represented an estimated 6% of our consolidated cost of sales for fiscal 2020. Going forward, continued or increased tariffs could negatively impact our gross margin and operating performance. These factors also have the potential to significantly impact global trade and economic conditions in many of the regions where we do business.

Adverse economic and industry conditions could have a negative impact on our business, results of operations and financial condition.
Customer demand within the contract office furniture and retail furnishings industries is affected by various macro-economic factors; general corporate profitability, service sector employment levels, new office construction rates and existing office vacancy rates are among the most influential factors. History has shown that declines in these measures can have an adverse effect on overall office furniture demand. Additionally, factors and changes specific to our industry, such as developments in technology, governmental standards and regulations, and health and safety issues can influence demand. There are current and future economic and industry conditions that could adversely affect our business, operating results, or financial condition.

Other macroeconomic developments, such as the United Kingdom referendum on European Union membership (commonly known as Brexit) could negatively affect the Company's ability to conduct business in those geographies. The current political and economic uncertainty relating to Brexit brings caution to the Company’s customer base as

Herman Miller, Inc. and Subsidiaries 8



capital investments are potentially put on hold pending the outcome of the negotiations. Furthermore, concerns exist relating to potential tariffs and customs regulations and the potential for short term logistics disruption as any such changes are implemented. This will impact both the Company's suppliers and customers, including distributors, and could result in product delays and inventory issues. Further uncertainty in the marketplace also brings risk to accounts receivable and could result in delays in collection and greater bad debt expense. There also remains a risk for the value of the British Pound and/or the Euro to further deteriorate, reducing the purchasing power of customers in these regions and potentially undermining the financial health of the Company's suppliers and customers in other parts of the world.

The markets in which we operate are highly competitive and we may not be successful in winning new business.
We are one of several companies competing for new business within the office furniture industry. Many of our competitors offer similar categories of products, including office seating, systems and freestanding office furniture, casegoods, storage as well as residential, education and healthcare furniture solutions. Although we believe that our innovative product design, functionality, quality, depth of knowledge, and strong network of distribution partners differentiate us in the marketplace, increased market pricing pressure could make it difficult for us to win new business with certain customers and within certain market segments at acceptable profit margins.

The retail furnishings market is highly competitive. We compete with national and regional furniture retailers, mail order catalogs and online retailers focused on home furnishings. We compete with these and other retailers for customers, suitable retail locations, vendors, qualified employees and management personnel. Some of our competitors have significantly greater financial, marketing and other resources than we possess. This may result in our competitors being quicker at the following: adapting to changes, devoting greater resources to the marketing and sale of their products, generating greater national brand recognition, or adopting more aggressive pricing and promotional policies, including free shipping offers. In addition, increased catalog mailings and/or digital marketing campaigns by our competitors may adversely affect response rates to our own marketing efforts. As a result, increased competition may adversely affect our future financial performance.

Our business presence outside the United States exposes us to certain risks that could negatively affect our results of operations and financial condition.
We have significant manufacturing and sales operations in the United Kingdom, which represents our largest marketplace outside the United States. We also have manufacturing operations in China, India, and Brazil. Additionally, our products are sold internationally through controlled subsidiaries or branches in Canada, Denmark, Korea, Mexico, Australia, China (including Hong Kong), India and Brazil. The Company's products are offered in Canada, Europe, the Middle East, Africa, Latin America and the Asia/Pacific region primarily through dealers.

Doing business internationally exposes us to certain risks, many of which are beyond our control and could potentially impact our ability to design, develop, manufacture, or sell products in certain countries. These factors could include, but would not necessarily be limited to:

Political, social and economic conditions
Global trade conflicts and trade policies
Legal and regulatory requirements
Labor and employment practices
Cultural practices and norms
Natural disasters
Security and health concerns
Protection of intellectual property
Changes in foreign currency exchange rates

In some countries, the currencies in which we import and export products can differ. Fluctuations in the rate of exchange between these currencies could negatively impact our business and our financial performance. Additionally, tariff and import regulations, international tax policies and rates, and changes in U.S. and international monetary policies may have an adverse impact on results of operations and financial condition.

9 2020 Annual Report



We are subject to risks and costs associated with protecting the integrity and security of our systems and confidential information.
We collect certain customer-specific data, including credit card information, in connection with orders placed through our e-commerce websites, direct-mail catalog marketing program, and retail studios. For these sales channels to function and develop successfully, we and other parties involved in processing customer transactions must be able to transmit confidential information, including credit card information and other personal information regarding our customers, securely over public and private networks. Third parties may have or develop the technology or knowledge to breach, disable, disrupt or interfere with our systems or processes or those of our vendors. While we believe we take reasonable steps to protect the security and confidentiality of the information we collect, we cannot guarantee that our security measures will effectively prevent others from obtaining unauthorized access to our information and our customers’ information. The techniques used to obtain unauthorized access to systems change frequently and are not often recognized until after they have been launched.

Any person who circumvents our security measures could destroy or steal valuable information or disrupt our operations. Any security breach could cause consumers to lose confidence in the security of our information systems, including our e-commerce websites or retail studios and choose not to purchase from us. Any security breach could also expose us to risks of data loss, litigation, regulatory investigations, and other significant liabilities. Such a breach could also seriously disrupt, slow or hinder our operations and harm our reputation and customer relationships, any of which could damage our business.

A security breach includes a third party wrongfully gaining unauthorized access to our systems for the purpose of misappropriating assets or sensitive information, loading corrupting data, or causing operational disruption. These actions may lead to a significant disruption of the Company’s IT systems and/or cause the loss of business and business information resulting in an adverse business impact, including: (1) an adverse impact on future financial results due to theft, destruction, loss misappropriation, or release of confidential data or intellectual property; (2) operational or business delays resulting from the disruption of IT systems, and subsequent clean-up and mitigation activities; and (3) negative publicity resulting in reputation or brand damage with customers, partners or industry peers.

The United States federal and state governments are increasingly enacting laws and regulations to protect consumers against identity theft. Also, as our business expands globally, we are subject to data privacy and other similar laws in various foreign jurisdictions. If we are the target of a cybersecurity attack resulting in unauthorized disclosure of our customer data, we may be required to undertake costly notification procedures. Compliance with these laws will likely increase the costs of doing business. If we fail to implement appropriate safeguards or to detect and provide prompt notice of unauthorized access as required by some of these laws, we could be subject to potential fines, claims for damages and other remedies, which could harm our business.

A sustained downturn in the economy could adversely impact our access to capital.
The disruptions in the global economic and financial markets during 2007 to 2009 adversely impacted the broader financial and credit markets, at times reducing the availability of debt and equity capital for the market as a whole. Conditions such as these could re-emerge in the future. Accordingly, our ability to access the capital markets could be restricted at a time when we would like, or need, to access those markets, which could have an adverse impact on our flexibility to react to changing economic and business conditions. The resulting lack of available credit, increased volatility in the financial markets and reduced business activity could materially and adversely affect our business, financial condition, results of operations, our ability to take advantage of market opportunities and our ability to obtain and manage our liquidity. In addition, the cost of debt financing and the proceeds of equity financing may be materially and adversely impacted by these market conditions. The extent of any impact would depend on several factors, including our operating cash flows, the duration of tight credit conditions and volatile equity markets, our credit capacity, the cost of financing, and other general economic and business conditions. Our credit agreements contain performance covenants, such as a limit on the ratio of debt to earnings before interest, taxes, depreciation and amortization, and limits on subsidiary debt and incurrence of liens. Although we believe none of these covenants is currently restrictive to our operations, our ability to meet the financial covenants can be affected by events beyond our control.

Herman Miller, Inc. and Subsidiaries 10



Disruptions in the supply of raw and component materials could adversely affect our manufacturing and assembly operations.
We rely on outside suppliers to provide on-time shipments of the various raw materials and component parts used in our manufacturing and assembly processes. The timeliness of these deliveries is critical to our ability to meet customer demand. Disruptions in this flow of delivery may have a negative impact on our business, results of operations, and financial condition.

Increases in the market prices of manufacturing materials may negatively affect our profitability.
The costs of certain manufacturing materials used in our operations are sensitive to shifts in commodity market prices, including the impact of the U.S. and retaliatory tariffs previously noted. In particular, the costs of steel, plastic, aluminum components, and particleboard are sensitive to the market prices of commodities such as raw steel, aluminum, crude oil, lumber, and resins. Increases in the market prices of these commodities, such as what we experienced in fiscal 2019 for steel, may have an adverse impact on our profitability if we are unable to offset them with strategic sourcing, continuous improvement initiatives or increased prices to our customers.

Disruptions within our dealer network could adversely affect our business.
Our ability to manage existing relationships within our network of independent dealers is crucial to our ongoing success. Although the loss of any single dealer would not have a material adverse effect on the overall business, our business within a given market could be negatively impacted by disruptions in our dealer network caused by the termination of commercial working relationships, ownership transitions, or dealer financial difficulties.

If dealers go out of business or restructure, we may suffer losses because they may not be able to pay for products already delivered to them. Also, dealers may experience financial difficulties, creating the need for outside financial support, which may not be easily obtained. In the past, we have, on occasion, agreed to provide direct financial assistance through term loans, lines of credit, and/or loan guarantees to certain dealers. Those activities increase our financial exposure.

We are unable to control many of the factors affecting consumer spending. Declines in consumer spending on furnishings could reduce demand for our products.
The operations of our Retail segment are sensitive to a number of factors that influence consumer spending, including general economic conditions, consumer disposable income, unemployment, inclement weather, availability of consumer credit, consumer debt levels, conditions in the housing market, interest rates, sales tax rates and rate increases, inflation, and consumer confidence in future economic conditions. Adverse changes in these factors may reduce consumer demand for our products, resulting in reduced sales and profitability.

A number of factors that affect our ability to successfully implement our retail studio strategy, including opening new locations and closing existing studios, are beyond our control. These factors may harm our ability to increase the sales and profitability of our retail operations.
Approximately 45 percent of the sales within our Retail segment are transacted within our retail studios. Additionally, we believe our retail studios have a direct influence on the volume of business transacted through other channels, including our consumer e-commerce and direct-mail catalog platforms, as many customers utilize these physical spaces to view and experience products prior to placing an order online or through the catalog call center. Our ability to open additional studios or close existing studios successfully will depend upon a number of factors beyond our control, including:

General economic conditions
Identification and availability of suitable studio locations
Success in negotiating new leases and amending or terminating existing leases on acceptable terms
Success of other retailers in and around our retail locations
Ability to secure required governmental permits and approvals
Hiring and training skilled studio operating personnel
Landlord financial stability


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Increasing competition for highly skilled and talented workers could adversely affect our business.
The successful implementation of our business strategy depends on our ability to attract and retain a skilled workforce. The increasing competition for highly skilled and talented employees could result in higher compensation costs, difficulties in maintaining a capable workforce, and leadership succession planning challenges.

Costs related to product defects could adversely affect our profitability.
We incur various expenses related to product defects, including product warranty costs, product recall and retrofit costs, and product liability costs. These expenses relative to product sales vary and could increase. We maintain reserves for product defect-related costs based on estimates and our knowledge of circumstances that indicate the need for such reserves. We cannot, however, be certain that these reserves will be adequate to cover actual product defect-related claims in the future. Any significant increase in the rate of our product defect expenses could have a material adverse effect on operations.

We are subject to risks associated with self-insurance related to health benefits.
We are self-insured for our health benefits and maintain per employee stop loss coverage; however, we retain the insurable risk at an aggregate level. Therefore unforeseen or catastrophic losses in excess of our insured limits could have a material adverse effect on the Company’s financial condition and operating results. See Note 1 of the Consolidated Financial Statements for information regarding the Company’s retention level.

Government and other regulations could adversely affect our business.
Government and other regulations apply to the manufacture and sale of many of our products. Failure to comply with these regulations or failure to obtain approval of products from certifying agencies could adversely affect the sales of these products and have a material negative impact on operating results.

Goodwill and indefinite-lived intangible asset impairment charges may adversely affect our operating results.
We have a substantial amount of goodwill and indefinite-lived intangible assets, primarily trademarks, on our balance sheet. We test the goodwill and intangible assets for impairment on an annual basis and when events occur or circumstances change that indicate that the fair value of the reporting unit or intangible asset may be below its carrying amount. Fair value determinations require considerable judgment and are sensitive to inherent uncertainties and changes in estimates and assumptions regarding actual and forecasted revenue growth rates and operating margins and discount rates. Declines in market conditions, a trend of weaker than anticipated financial performance for our reporting units or declines in projected revenue for our trademarks, a decline in our share price for a sustained period of time, an increase in the market-based weighted average cost of capital or a decrease in royalty rates, among other factors, are indicators that the carrying value of our goodwill or indefinite-life intangible assets may not be recoverable. We may be required to record a goodwill or intangible asset impairment charge that, if incurred, could have a material adverse effect on our financial statements.

Impairment of long-lived assets may adversely affect our operating results.
Our long-lived asset groups are subject to an impairment assessment when certain triggering events or circumstances indicate that their carrying value may be impaired. If the carrying value exceeds our estimate of future undiscounted cash flows of the operations related to the asset group, an impairment is recorded for the difference between the carrying amount and the fair value of the asset group. The results of these tests for potential impairment may be adversely affected by unfavorable market conditions, our financial performance trends, or an increase in interest rates, among other factors. If as a result of the impairment test we determine that the fair value of any of our long-lived asset groups is less than its carrying amount, we may incur an impairment charge that could have a material adverse effect on our financial statements.

Item 1B Unresolved Staff Comments
None


Herman Miller, Inc. and Subsidiaries 12



Item 2 Properties
The Company owns or leases facilities located throughout the United States and several foreign countries. The location, square footage and use of the most significant facilities at May 30, 2020 were as follows:

hmi10kmap.jpg
Owned Locations
Square Footage
(in Thousands)

 
Use
Zeeland, Michigan
771

 
Manufacturing, Warehouse, Office
Spring Lake, Michigan
583

 
Manufacturing, Warehouse, Office
Holland, Michigan
357

 
Warehouse
Holland, Michigan
293

 
Manufacturing, Office
Holland, Michigan
238

 
Office, Design
Sheboygan, Wisconsin
208

 
Manufacturing, Warehouse, Office
Melksham, United Kingdom
170

 
Manufacturing, Warehouse, Office
Hildebran, North Carolina
93

 
Manufacturing, Office
 
 
 
 
Leased Locations
Square Footage
(in Thousands)

 
Use
Batavia, Ohio
618

 
Warehouse
Dongguan, China
429

 
Manufacturing, Office
Atlanta, Georgia
180

 
Manufacturing, Warehouse, Office
Bangalore, India
105

 
Manufacturing, Warehouse
Yaphank, New York
92

 
Warehouse, Office
Mexico City, Mexico
77

 
Warehouse
New York City, New York
67

 
Office, Retail
Hong Kong, China
54

 
Warehouse
Chicago, Illinois*
45

 
Office, Retail
Brooklyn, New York
39

 
Warehouse, Retail
Stamford, Connecticut
35

 
Office, Retail
*Under construction and expected to open in FY21.

As of May 30, 2020, the Company operated 39 retail studios (including 35 operating under the DWR brand, 3 under the HAY brand, and a Herman Miller Flagship store in New York) that totaled approximately 400,000 square feet of selling space. The Company also maintains administrative and sales offices and showrooms in various other locations throughout North America, Europe, Asia/Pacific and Latin America. The Company considers its existing facilities to be in good condition and adequate for its design, production, distribution, and selling requirements.


13 2020 Annual Report



Item 3 Legal Proceedings
The Company is involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such proceedings and litigation currently pending will not materially affect the Company’s consolidated operations, cash flows and financial condition.

Additional Item: Executive Officers of the Registrant
Certain information relating to Executive Officers of the Company as of May 30, 2020 is as follows:
hmi10kowen.jpg
 
Andrea R. Owen
President and
Chief Executive Officer
Age 55, elected as an
Executive Officer in 2018
 
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Benjamin P.T. Groom
Chief Digital Officer
Age 36, elected as an
Executive Officer in 2019
 
 
 
 
 
 
 
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B. Ben Watson
Chief Creative Officer
Age 55, elected as an
Executive Officer in 2010
 
hmi10kpropst.jpg
 
Debbie Propst
President, Retail
Age 39, elected as an
Executive Officer in 2020
 
 
 
 
 
 
 
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Gregory J. Bylsma
President,
North America Contract
Age 55, elected as an
Executive Officer in 2009
 
hmi10krice.jpg
 
Jacqueline H. Rice
General Counsel
Age 48, elected as an
Executive Officer in 2019
 
 
 
 
 
 
 
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Jeffrey L. Kurburski
Chief Technology Officer
Age 52, elected as an
Executive Officer in 2018
 
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Jeffrey M. Stutz
Chief Financial Officer
Age 49, elected as an
Executive Officer in 2009
 
 
 
 
 
 
 
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Jeremy Hocking
President,
International Contract
Age 59, elected as an
Executive Officer in 2017
 
hmi10kveltman.jpg
 
Kevin Veltman
Vice President, Investor
Relations & Treasurer
Age 45, elected as an
Executive Officer in 2015
 
 
 
 
 
 
 
hmi10klyon.jpg
 
Megan Lyon
Chief Strategy Officer
Age 40, elected as an
Executive Officer in 2019
 
hmi10kstraker.jpg
 
Tim Straker
Chief Marketing Officer
Age 54, elected as an
Executive Officer in 2020


Herman Miller, Inc. and Subsidiaries 14



Except as discussed below, each of the named officers has served the Company in an executive capacity for more than five years.
Ms. Owen joined Herman Miller, Inc. in 2018 and serves as President and Chief Executive Officer. Prior to joining Herman Miller, Ms. Owen spent twenty-five years at The Gap, Inc. where she most recently served as Global President of Banana Republic.
Mr. Groom joined Herman Miller, Inc. in 2019 and serves as Chief Digital Officer. Prior to joining Herman Miller, Mr. Groom spent six years with The Boston Consulting Group where he was a Principal member of the firm’s Technology Advantage, Retail and Consumer practices.
Ms. Propst joined Herman Miller, Inc. in 2020 and serves as President of the Company's Retail segment. Prior to joining Herman Miller, Ms. Propst spent seven years at Bed Bath and Beyond where she most recently served as President and Chief Merchandising Officer of One Kings Lanes, as well as Chief Brand Officer for Bed Bath and Beyond.
Ms. Rice joined Herman Miller, Inc. in 2019 and serves as General Counsel. Prior to joining Herman Miller, Ms. Rice served as Executive Vice President, Chief Risk & Compliance Officer at Target Corporation as well as Senior Counsel and Chief Compliance Officer at General Motors Co.
Ms. Lyon joined Herman Miller, Inc. in 2019 and serves as Chief Strategy Officer. Prior to joining Herman Miller, Ms. Lyon spent eleven years with The Boston Consulting Group where she was a Partner and Managing Director leading the firm’s West Coast Consumer and Retail Practice.
There are no family relationships between or among the above-named executive officers. There are no arrangements or understandings between any of the above-named officers pursuant to which any of them was named an officer.

Item 4 Mine Safety Disclosures
Not applicable


15 2020 Annual Report



PART II
Item 5 Market for the Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Share Price, Earnings and Dividends Summary
Herman Miller, Inc.'s common stock is traded on the NASDAQ-Global Select Market System (Symbol: MLHR). As of July 22, 2020, there were approximately 26,000 shareholders of record, including individual participants in security position listings, of the Company's common stock.

Dividends were declared for the first three quarters of fiscal 2020 and all quarters of fiscal 2019 as approved by the Board of Directors. Herman Miller previously announced the deferral of its third quarter fiscal 2020 dividend payment to shareholders of record as of February 29, 2020. That dividend was originally scheduled to be paid on April 15, 2020. The Company's Board of Directors subsequently approved the payment of this dividend, which was made on July 15, 2020. The Company has suspended future dividend payments given the ongoing uncertainty caused by COVID–19.

Issuer Purchases of Equity Securities
The Company has one share repurchase plan authorized by the Board of Directors on January 16, 2019, which provides a share repurchase authorization of $250.0 million with no specified expiration date. The approximate dollar value of shares available for purchase under the plans at May 30, 2020 was $237.6 million.

The following is a summary of share repurchase activity during the Company's fourth fiscal quarter ended May 30, 2020:
Period
Total Number of Shares (or Units) Purchased
 
Average Price Paid per Share or Unit
 
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet be Purchased Under the Plans or Programs (1) 
3/1/20-3/28/20
15,026

 
$
32.20

 
15,026

 
$
237,689,005

3/29/20-4/25/20
404

 
$
24.08

 
404

 
$
237,679,278

4/26/20-5/30/20
1,801

 
$
20.63

 
1,801

 
$
237,642,176

Total
17,231

 


 
17,231

 
 
  
During the period covered by this report, the Company did not sell any shares of common stock that were not registered under the Securities Act of 1933.


Herman Miller, Inc. and Subsidiaries 16



Stockholder Return Performance Graph
Set forth below is a line graph comparing the yearly percentage change in the cumulative total stockholder return on the Company's common stock with that of the cumulative total return of the Standard & Poor's 500 Stock Index and the NASDAQ Composite Total Return for the five-year period ended May 30, 2020. The graph assumes an investment of $100 on May 30, 2015 in the Company's common stock, the Standard & Poor's 500 Stock Index and the NASDAQ Composite Total Return, with dividends reinvested.

chart-d59a51b29b3014a0885.jpg

2015
 
2016
 
2017
 
2018
 
2019
 
2020
Herman Miller, Inc.
$
100

 
$
116

 
$
123

 
$
126

 
$
139

 
$
93

S&P 500 Index
$
100

 
$
100

 
$
116

 
$
130

 
$
131

 
$
144

NASDAQ Composite Total Return
$
100

 
$
99

 
$
127

 
$
154

 
$
154

 
$
198


Information required by this item is also contained in Item 12 of this report.


17 2020 Annual Report



Item 6 Selected Financial Data
(In millions, except key ratios and per share data)
2020
 
2019
 
2018
 
2017
 
2016
Operating Results
 
 
 
 
 
 
 
 
 
Net sales
$
2,486.6

 
$
2,567.2

 
$
2,381.2

 
$
2,278.2

 
$
2,264.9

Gross margin
910.7

 
929.9

 
873.0

 
864.2

 
874.2

Selling, general, and administrative (1)
669.7

 
649.5

 
621.0

 
592.9

 
585.6

Impairment charges
205.4

 

 

 
7.1

 

Design and research
74.0

 
76.9

 
73.1

 
73.1

 
77.1

Operating (loss) earnings
(38.4
)
 
203.5

 
178.9

 
191.1

 
211.5

(Loss) earnings before income taxes and equity income
(13.4
)
 
195.1

 
168.1

 
177.6

 
196.6

Net (loss) earnings
(14.4
)
 
160.5

 
128.7

 
124.1

 
137.5

Net cash provided by operating activities
221.8

 
216.4

 
166.5

 
202.1

 
210.4

Net cash used in investing activities
(168.1
)
 
(165.0
)
 
(62.7
)
 
(116.3
)
 
(80.8
)
Net cash provided by (used in) financing activities
244.0

 
(91.9
)
 
2.5

 
(74.6
)
 
(106.5
)
Depreciation and amortization
79.5

 
72.1

 
66.9

 
58.9

 
53.0

Capital expenditures
69.0

 
85.8

 
70.6

 
87.3

 
85.1

Common stock repurchased plus cash dividends paid
63.0

 
93.5

 
88.9

 
63.1

 
49.0

 
 
 
 
 
 
 
 
 
 
Key Ratios
 
 
 
 
 
 
 
 
 
Sales (decline) growth
(3.1
)%
 
7.8
%
 
4.5
%
 
0.6
 %
 
5.7
%
Gross margin (2)
36.6

 
36.2

 
36.7

 
37.9

 
38.6

Selling, general, and administrative (1) (2)
26.9

 
25.3

 
26.1

 
26.0

 
25.9

Design and research (2)
3.0

 
3.0

 
3.1

 
3.2

 
3.4

Operating (loss) earnings (2)
(1.5
)
 
7.9

 
7.5

 
8.4

 
9.3

Net earnings growth (decline)
(109.0
)
 
24.7

 
3.7

 
(9.7
)
 
40.2

After-tax return on net sales (3)
(0.6
)
 
6.3

 
5.4

 
5.4

 
6.1

After-tax return on average assets (4)
(0.8
)
 
10.5

 
9.2

 
9.8

 
11.3

After-tax return on average equity (5)
(2.1
)
 
23.2

 
20.6

 
22.3

 
29.1

 
 
 
 
 
 
 
 
 
 
Share and Per Share Data
 
 
 
 
 
 
 
 
 
(Loss) earnings per share-diluted
$
(0.15
)
 
$
2.70

 
$
2.12

 
$
2.05

 
$
2.26

Cash dividends declared per share
0.63

 
0.79

 
0.72

 
0.68

 
0.59

Book value per share at year end (6)
10.94

 
12.23

 
11.22

 
9.84

 
8.76

Market price per share at year end
23.02

 
35.49

 
32.85

 
32.70

 
31.64

Weighted average shares outstanding-diluted
58.9

 
59.4

 
60.3

 
60.6

 
60.5

 
 
 
 
 
 
 
 
 
 
Financial Condition
 
 
 
 
 
 
 
 
 
Total assets
$
2,053.9

 
$
1,569.3

 
$
1,479.5

 
$
1,306.3

 
$
1,235.2

Working capital (7)
403.8

 
215.2

 
231.6

 
106.2

 
90.5

Current ratio (8)
1.8

 
1.5

 
1.6

 
1.3

 
1.2

Interest-bearing debt and related swap agreements (9)
558.8

 
282.8

 
265.1

 
197.8

 
221.9

Stockholders' equity
643.0

 
719.2

 
664.8

 
587.7

 
524.7

Total capital (10)
1,201.8

 
1,002.0

 
929.9

 
785.5

 
746.6

(1) Selling, general, and administrative expenses include restructuring expenses in years that are applicable.
(2) Shown as a percent of net sales.
(3) Calculated as net earnings divided by net sales.
(4) Calculated as net earnings divided by average assets.
(5) Calculated as net earnings divided by average equity.
(6) Calculated as total stockholders' equity divided by common shares of stock outstanding.
(7) Calculated using current assets less current liabilities.
(8) Calculated using current assets divided by current liabilities.
(9) Amounts shown include the fair market value of the Company’s interest rate swap arrangement(s).
(10) Calculated as interest-bearing debt and related swap agreements plus stockholders' equity.


Herman Miller, Inc. and Subsidiaries 18



Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the issues discussed in Management's Discussion and Analysis in conjunction with the Company's Consolidated Financial Statements and the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K.

Executive Overview
Herman Miller’s mission statement is Inspiring Designs to Help People Do Great Things. At present, most customers come to the Company for furnishing interior environments in corporate offices, healthcare settings, higher education institutions and residential spaces. The Company's primary products include furniture systems, seating, storage, freestanding furniture, healthcare environment products, casegoods, textiles and related technologies and services.

More than 100 years of innovative business practices and a commitment to social responsibility have established Herman Miller as a recognized global company. The Company trades on the NASDAQ Global Select Market under the symbol MLHR.

Herman Miller's products are sold internationally through wholly-owned subsidiaries or branches in various countries including the United Kingdom, Denmark, Canada, Japan, Korea, Mexico, Australia, Singapore, China, Hong Kong, India and Brazil. The Company's products are offered elsewhere in the world primarily through independent dealerships or joint ventures with customers in over 100 countries.

The Company is globally positioned in terms of manufacturing operations. In the United States, manufacturing operations are located in Michigan, Georgia, Wisconsin and North Carolina. In Europe, its manufacturing presence is located in the United Kingdom. Manufacturing operations globally also include facilities located in China, Brazil and India. The Company manufactures products using a system of lean manufacturing techniques collectively referred to as the Herman Miller Performance System (HMPS). For its contract furniture business, Herman Miller strives to maintain efficiencies and cost savings by minimizing the amount of inventory on hand. Accordingly, production is order-driven with direct materials and components purchased as needed to meet demand. The standard manufacturing lead time for the majority of our products is 10 to 20 days. These factors result in a high rate of inventory turns related to our manufactured inventories.

A key element of the Company's manufacturing strategy is to limit fixed production costs by sourcing component parts from strategic suppliers. This strategy has allowed the Company to increase the variable nature of its cost structure, while retaining proprietary control over those production processes that the Company believes provide a competitive advantage. As a result of this strategy, the Company's manufacturing operations are largely assembly-based.

A key element of the Company's growth strategy is to scale the Retail business through the Company's Design Within Reach (DWR), 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.

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

19 2020 Annual Report



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, naughtone, and Herman Miller Collection products.

International Contract — Includes the operations associated with the design, manufacture and sale of furniture products, primarily for work-related settings in 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 e-commerce, direct mailing catalogs and DWR and HAY studios.

The Company also reports a corporate category consisting primarily of unallocated corporate expenses related to general corporate functions, including, but not limited to, certain legal, executive, corporate finance, information technology, administrative and acquisition-related costs.

Core Strengths
The Company relies on the following core strengths in delivering solutions to customers:

Portfolio of Leading Brands and Products - Herman Miller is a globally-recognized, authentic brand known for working with some of the most well-known and respected designers in the world. Over the years, it has evolved into Herman Miller Group, a family of brands that collectively offers a variety of products for environments where people live, learn, work, 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.

Omni-Channel Reach - The Company has built a multi-channel distribution capability that it considers unique. Through contract furniture dealers, direct customer sales, retail studios, e-commerce, catalogs and independent retailers, the Company serves contract and residential customers across a range of channels and geographies.

Global Scale - In addition to its global omni-channel distribution capability, the Company has a global network of designers, suppliers, manufacturing operations and research and development centers that position the Company to serve contract and residential customers globally. The Company believes that leveraging this global scale will be an important enabler to executing its strategy.

Herman Miller, Inc. and Subsidiaries 20



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 U.S. 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 2020 the Retail business unit included 39 retail studios (including 35 operating under the DWR brand, 3 under the HAY brand, and a Herman Miller Flagship store in New York). This business also operates 5 outlet studios. The retail and outlet studios are located in metropolitan areas throughout North America.

E-commerce - The Company sells products through its online stores, in which products are available for sale via the Company's website, hermanmiller.com, global e-commerce platforms, as well as through the dwr.com and us.hay.com online stores. These sites complement our existing methods of distribution and extend the Company's brand to new customers.

Direct-Mail Catalogs - The Company’s Retail business unit utilizes a direct-mail catalog program through its DWR subsidiary. A regular schedule of catalog mailings is maintained throughout the fiscal year and these serve as a key driver of sales across each of DWR’s channels, including retail studios and e-commerce websites.

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.


21 2020 Annual Report



Areas of Strategic Focus
Despite a number of risks and challenges, the Company believes it is well positioned to successfully pursue its mission of inspiring designs to help people do great things. As our business and industry continue to evolve, we are constantly focused on staying ahead of the curve. With the composition of the office floor plate moving toward a broader variety of furnishings, a greater desire for customization from our customers, new technologies, and trends towards urbanization and more seamless transactions in the retail world, we have centered our overall value creation strategy on four key priorities.

hmi10kstrategy1.jpg
 
Unlock the Power of One Herman Miller
Coming together as a family of complementary brands will help achieve our goals of more actively moving into the consumer marketplace, growing globally and making it easier to do business with us. We strive to become more agile, invest in responsive innovation, simplify our go-to-market strategy and continue to lead in product innovation across all our businesses globally.
 
 
 
hmi10kstrategy2.jpg
 
Build a Customer-centric, Digitally-enabled Business Model
Building a customer centric and digitally enabled business model is at the forefront of our goal to become easier to do business with us. We will leverage our deep understanding of customer journeys to deliver inspired products and a frictionless customer experience. Along with strengthening the core technology backbone, we will also drive step-change in data, analytics, marketing and brand capabilities.

 
 
 
hmi10kstrategy3.jpg
 
Accelerate Profitable Growth
There are identified opportunities for growth ahead in each of our business segments. We believe we are the only company in our industry with access to meaningful contract and residential growth opportunities on a global scale. At the same time, with our ongoing focus on operational excellence and specific profit improvement initiatives, we are focused on continuous improvement of our cost structure.
 
 
 
hmi10kstrategy4.jpg
 
Reinforce Our Commitment to Our People, Planet, Communities
With a legacy of corporate social responsibility that is deeply ingrained in our culture, we will reinforce our commitment to our people, planet and communities in a more integrated and deliberate way than ever before. We will focus on building, developing and retaining world-class talent, shaping an inclusive and diverse workforce and elevating our Better World commitment. Doing so will enable us to create value for our shareholders, customers and employees, as well as for the broader communities and environment in which we operate.

The Company believes its strategy continues to respond well to current and future realities in its markets. The Company's strategic priorities are aimed at creating a sustainable and diverse revenue model that puts the customer at the center of everything we do and leverages enabling digital capabilities to fully realize that vision.


Herman Miller, Inc. and Subsidiaries 22



Business Overview
The following is a summary of the significant events and items impacting the Company's operations for the year ended May 30, 2020:

Net sales were $2,486.6 million, representing a decrease of 3.1% when compared to the prior year. The decrease in net sales was driven primarily by decreased sales volumes in the fourth quarter of fiscal 2020 due to the outbreak of COVID-19 and related facility shut-downs, offset by the acquisitions of HAY and naughtone and incremental list price increases, net of contract price discounting. On an organic basis, net sales were $2,398.7 million(*), representing a decrease of 6.6% when compared to the prior year.

Gross margin was 36.6% as compared to 36.2% in the prior year. The increase in gross margin was driven primarily by list price increases and profitability improvement efforts, partially offset by reduced leverage of fixed overhead expenses across all segments due to the onset of COVID-19 during the fourth quarter of fiscal 2020 and higher net freight expenses within the Retail segment.

Operating expenses increased by $222.7 million or 30.7% as compared to the prior year. Operating expenses included non-cash charges of $205 million in the current year for the impairment of goodwill, intangible assets and right of use assets related to Design Within Reach, Maharam, HAY and naughtone. These charges were determined based on the Company's annual impairment review process and indicators of impairment arising from the impact of COVID-19 on financial results. Refer below to "Critical Accounting Policies and Estimates" for additional information. Operating expenses also included special charges totaling $12.3 million and restructuring costs of $26.4 million. Special charges related mainly to certain costs arising as a direct result of COVID-19 and initial purchase accounting effects of the Company's investments in HAY and naughtone. Restructuring costs related mainly to severance and outplacement benefits associated with workforce reductions and profit improvement initiatives implemented during the year.

Other income in the current year reflected a pre-tax gain of $36.2 million related to the purchase accounting treatment of initial equity-method investments in naughtone and HAY. The Company became the majority owner of both naughtone and HAY in the current year and as a result was required to record certain fair value adjustments which resulted in a non-taxable gain.

The effective tax rate was negative 44.9% for fiscal 2020 compared to 20.3% for the prior year. Excluding the impact of adjustments related to impairment, restructuring and other special charges recorded during the year, a portion of which were not deductible for tax purposes, the effective tax rate for the 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 (loss) earnings per share decreased $2.85 to $(0.15), a 105.6% decrease as compared to the prior year. Excluding the impact of the gain on consolidation of equity method investments, impairment charges, restructuring expenses and other special charges, adjusted diluted earnings per share were $2.61(*), a 12.1% decrease as compared to the prior year.

The Company declared cash dividends of $0.63 per share compared to $0.79 per share in the prior year. In the fourth quarter of the current fiscal year, the Company's Board of Directors temporarily suspended all future dividends in response to the economic uncertainty brought on by the onset of COVID-19.

The Company made strategic investments in the form of acquisitions during the fiscal year. These included $46 million to acquire the remaining outstanding shares of naughtone, and $79 million to acquire an additional 34% ownership stake in HAY.

In March 2020, the Company borrowed an additional $265 million under its syndicated revolving line of credit as a precautionary measure to provide additional near-term liquidity given the uncertainty related to COVID-19,

23 2020 Annual Report



which was subsequently repaid in June 2020. On May 20, 2020, the Company issued unsecured senior private placement debt securities in the amount of $50.0 million.

The following summary includes the Company's view on the economic environment in which it operates:

The North American macro-economic picture was generally positive through the first three quarters of the fiscal year with positive job growth, corporate profitability and architectural billing activity.

The disruption from the COVID-19 pandemic adversely impacted the fourth quarter of our fiscal year as Gross Domestic Product forecasts and industry order trends, as reported by the Business and Institutional Furniture Manufacturers Association ("BIFMA"), have highlighted near-term demand pressures from the slowdown in economic activity from the pandemic.

The Company is monitoring the resolution of various trade policy negotiations between the U.S. and key trading partners as well as the ongoing negotiations concerning the U.K. referendum to exit the European Union ("Brexit"). These negotiations create a level of uncertainty in key markets, particularly the U.K., continental Europe and China, which, if unresolved in the near term, will likely 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 Retail segment supports the home environment, including home offices, which is a category of particular emphasis by consumers in the near-term. The Company also continues to optimize its business model related to shipping with increasing customer expectations that the products they buy should come with free or discounted shipping. In response, the Company is continuing to evaluate a variety of strategies, including negotiating lower costs from third party freight providers, implementing actions aimed at improving the efficiency of its logistics processes and more closely reflecting the cost of delivery into the base price of its products.

The remaining sections of Item 7 include additional analysis of the fiscal year ended May 30, 2020, including discussion of significant variances compared to the prior year period. A detailed review of our fiscal 2019 performance compared to our fiscal 2018 performance is set forth in Part II, Item 7 of our Form 10-K for the fiscal year ended June 1, 2019.
(*) Non-GAAP measurements; see accompanying reconciliations and explanations.

COVID-19 Update
The outbreak of COVID-19 adversely impacted our financial performance for fiscal 2020 and will have an adverse impact in fiscal 2021. This outbreak has impacted our supply base as well as resulted in temporary facility closures in locations throughout the globe beginning in February and continuing into the fourth quarter. The extent of the geographic spread and duration of this virus, the impact on our supply chain, demand for our products, and related financial impact cannot be estimated at this time with any degree of certainty.

Employee Safety and Health
The Company has instituted a number of safety measures to contain the spread of COVID-19, including domestic and international travel restrictions, work-from-home practices, extensive cleaning protocols, additional safety measures including temperature checks and face coverings, measures to promote physical (social) distancing in the workplace, and the temporary closure to the public of our showrooms and retail studios.


Herman Miller, Inc. and Subsidiaries 24



Customer Focus
The Company's customer service, sales, supplier and dealer teams are working closely with customers to meet current demand. Sales teams are meeting with customers remotely via video calls, online chat functionality, and virtual reality to continue the design and specification process that would normally take place in a showroom. Customer service representatives are working remotely to stay connected to customers regarding order status and projected delivery dates. The Company recently opened some showroom and retail locations around the globe to the public. Customers can also make private appointments to shop in person or shop online with the Company's team virtually.

Manufacturing and Operations
As a global manufacturer, the Company responded to various shelter-in-place and similar government orders in locations around the world in which it operates.

In Michigan, Governor Gretchen Whitmer’s “Stay Home, Stay Safe” executive order required all non-essential businesses to close during the three week period that ended April 13, 2020. However, as the Company serves the health care industry and the federal government, among other critical sectors, the Company continued to help support customers actively engaged in the COVID-19 response. In an effort to support the thousands of medical workers on the front lines of the battle against COVID-19, this work also included transforming a portion of its manufacturing footprint to fulfill the immediate need for medical related products and personal protective equipment. The Company continues to produce masks and face shields for its own employees and continues to donate to community members and nonprofits in need of personal protection equipment. This work is being completed at many of the Company's U.S. manufacturing locations.

Internationally, the status of the Company’s manufacturing and warehouse facilities vary based on government orders. While certain facilities were temporarily closed during a portion of the year, the majority of the Company’s manufacturing and warehouse locations are operating at full capacity, with some locations operating at reduced capacity with flexible hours and shifts to ensure employee safety.

The Company continues to monitor similar executive orders to understand the potential impact on its operations in other areas.
 
Retail Operations
DWR and HAY retail studios and stores across the US are currently open to the public in various capacities with safety precautions in place. The Company’s distribution center in Batavia, Ohio has continued without disruption. Freight carriers are delivering to every market domestically but changing policies and procedures daily that may affect distribution. In some markets the Company is unable to offer white glove delivery currently, but can coordinate with customers to deliver product to their door. Its e-commerce platforms are fully operational.

Cost Reductions
The Company has implemented a range of actions aimed at temporarily reducing costs and preserving liquidity. These actions include reducing our salaried workforce by approximately 400 through voluntary and involuntary workforce reductions, a 10% reduction in cash compensation for the majority of the Company's salaried workforce and an additional 15% salary deferral of the Company's executive leadership team. Additionally the Company has temporarily suspended the quarterly dividend payout and certain employer-paid retirement contributions, compensation increases and cash incentive bonus programs. The Company will continue to evaluate further ways to manage costs in line with reduced revenue levels.

Reconciliation of Non-GAAP Financial Measures
This report contains references to Organic net sales and Adjusted earnings per share - diluted, which are non-GAAP financial measures. Organic Growth (Decline) represents the change in 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 the adoption of the U.S. Tax Cuts and Jobs Act, purchase accounting adjustments related to the HAY and naughtone investments, impairment charges, restructuring expenses and other

Herman Miller, Inc. and Subsidiaries 25



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 costs related to CEO transition, third party consulting costs related to the Company's profit enhancement initiatives, acquisition-related costs and certain costs arising as a direct result of COVID-19.

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 periods ended as indicated below:
 
May 30, 2020
June 1, 2019
 
North America
International
Retail
Total
North America
International
Retail
Total
Net Sales, as reported
$
1,598.2

$
502.8

$
385.6

$
2,486.6

$
1,686.5

$
492.2

$
388.5

$
2,567.2

% change from PY
(5.2
)%
2.2
 %
(0.7
)%
(3.1
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Proforma Adjustments
 
 
 
 
 
 
 
 
Acquisitions
(11.8
)
(83.8
)

(95.6
)




Currency Translation Effects (1)
0.7

7.0


7.7





Organic net sales
$
1,587.1

$
426.0

$
385.6

$
2,398.7

$
1,686.5

$
492.2

$
388.5

$
2,567.2

% change from PY
(5.9
)%
(13.4
)%
(0.7
)%
(6.6
)%
 
 
 
 
(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 indicated:
 
May 30, 2020
June 1, 2019
(Loss) Earnings per Share - Diluted
$
(0.15
)
$
2.70

 
 
 
Less: Adjustments Related to Adoption of U.S. Tax Cuts and Jobs Act

(0.02
)
Less: Investment fair value adjustments, after tax

(0.03
)
Add: Inventory step up on HAY equity method investment, after tax

0.01

Less: Gain on consolidation of equity method investments
(0.63
)

Add: Special charges, after tax
0.15

0.18

Add: Impairment charges, after tax
2.90


Add: Restructuring expenses, after tax
0.34

0.13

Adjusted Earnings per Share - Diluted
$
2.61

$
2.97

 
 
 
Weighted Average Shares Outstanding (used for Calculating Adjusted Earnings per Share) – Diluted
58,920,653

59,381,791

Note: The adjustments above are net of tax. For the twelve months ended May 30, 2020 and June 1, 2019, the tax impact of the adjustments were $0.62 and $0.10, respectively.



Herman Miller, Inc. and Subsidiaries 26



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 2020
 
Fiscal 2019
 
% Change
Net sales
$
2,486.6

 
$
2,567.2

 
(3.1
)%
Cost of sales
1,575.9

 
1,637.3

 
(3.8
)%
Gross margin
910.7

 
929.9

 
(2.1
)%
Operating expenses
949.1

 
726.4

 
30.7
 %
Operating (loss) earnings
(38.4
)
 
203.5

 
(118.9
)%
Gain on consolidation of equity method investments
36.2

 

 
n/a

Other expenses, net
11.2

 
8.4

 
33.3
 %
(Loss) earnings before income taxes and equity income
(13.4
)
 
195.1

 
(106.9
)%
Income tax expense
6.0

 
39.6

 
(84.8
)%
Equity income from nonconsolidated affiliates, net of tax
5.0

 
5.0

 
 %
Net (loss) earnings
(14.4
)
 
160.5

 
(109.0
)%
Net loss attributable to redeemable noncontrolling interests
(5.3
)
 

 
n/a

Net (loss) earnings attributable to Herman Miller, Inc.
$
(9.1
)
 
$
160.5

 
(105.7
)%

The following table presents, for the periods indicated, the components of the Company's Consolidated Statements of Comprehensive Income as a percentage of net sales:
 
Fiscal 2020
 
Fiscal 2019
Net sales
100.0
 %
 
100.0
%
Cost of sales
63.4

 
63.8

Gross margin
36.6

 
36.2

Operating expenses
38.2

 
28.3

Operating (loss) earnings
(1.5
)
 
7.9

Gain on consolidation of equity method investments
1.5

 

Other expenses, net
0.5

 
0.3

(Loss) earnings before income taxes and equity income
(0.5
)
 
7.6

Income tax expense
0.2

 
1.5

Equity income from nonconsolidated affiliates, net of tax
0.2

 
0.2

Net (loss) earnings
(0.6
)
 
6.3

Net loss attributable to redeemable noncontrolling interests
(0.2
)
 

Net (loss) earnings attributable to Herman Miller, Inc.
(0.4
)
 
6.3



27 2020 Annual Report



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.
chart-94d5379a74545f17ae8.jpg
Net sales decreased $80.6 million or 3.1% compared to the prior year fiscal period. The following items contributed to the change:

Increase of approximately $96 million due to the acquisitions of HAY and naughtone.
Incremental list price increases, net of contract price discounting, of approximately $45 million.
Decreased sales volumes within the North America segment of approximately $141 million and decreased sales volumes within the International segment of approximately $72 million, both primarily due to the outbreak of COVID-19 and related facility shut-downs.
Foreign currency translation had a negative impact on net sales of approximately $8 million.

Gross Margin
Gross margin was 36.6% for fiscal 2020 as compared to 36.2% for fiscal 2019. The following factors summarize the major drivers of the year-over-year change in gross margin percentage:

Incremental list price increases, net of contract price discounting, increased gross margin by approximately 120 basis points.
Ongoing profitability improvement efforts increased gross margin by approximately 70 basis points.
Reduced production leverage due to lower manufacturing volume resulting from COVID-19-related facility shut-downs decreased gross margin by approximately 80 basis points.
Higher net freight expenses within the Retail segment decreased gross margin by approximately 50 basis points.
Special charges related to the initial purchase accounting of HAY and naughtone combined with unfavorable product mix associated with the business acquisitions decreased gross margin by approximately 20 basis points.


Herman Miller, Inc. and Subsidiaries 28



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.

chart-5ab262939cab58709e1.jpg
Operating expenses increased by $222.7 million or 30.7% compared to the prior year fiscal period. The following factors contributed to the change:

Non-cash charges of $205 million in the current year for the impairment of goodwill, intangible assets and right of use assets related to Design Within Reach, Maharam, HAY and naughtone.
The acquisition of HAY and naughtone increased Operating expenses by approximately $27 million.
Restructuring expenses increased by approximately $16 million, primarily related to voluntary and involuntary reductions in the Company's North American and International workforces, partially offset by lower special charges.
Lower marketing and selling expenses primarily within the North America Contract segment of approximately $16 million.
Lower design and research expenses of approximately $3 million.

Other Income/Expense
Other income/expense in the current year reflected a pre-tax gain of $36.2 million related to the purchase accounting treatment of initial equity-method investments in naughtone and HAY. The Company became the majority owner of both naughtone and HAY in the current year and as a result was required to record certain fair value adjustments which resulted in a non-taxable gain.

Net other expenses for fiscal 2020 of $11.2 million increased compared to fiscal 2019 primarily as a result of a $2.1 million fair value adjustment gain in fiscal 2019.

Income Taxes
See Note 11 of the Consolidated Financial Statements for additional information.


29 2020 Annual Report



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.
chart-dc0536a0a6ed55bd865.jpgchart-abe26c5c05a851bf814.jpg
chart-5b4a60adf7165265b4d.jpgchart-3ae8c7849c10536490d.jpg

Herman Miller, Inc. and Subsidiaries 30



North America Contract ("North America")
(Dollars in millions)
Fiscal 2020
 
Fiscal 2019
 
Change
Net sales
$
1,598.2

 
$
1,686.5

 
$
(88.3
)
Gross margin
580.6

 
592.3

 
(11.7
)
Gross margin %
36.3
%
 
35.1
%
 
1.2
 %
Operating earnings
130.9

 
189.7

 
(58.8
)
Operating earnings %
8.2
%
 
11.2
%
 
(3.0
)%

Net sales decreased 5.2%, or 5.9%(*) on an organic basis, over the prior year due to:

Decreased sales volumes within the North America segment of approximately $141 million, primarily due to the outbreak of COVID-19 and related facility shut-downs; offset by
Incremental list price increases, net of contract price discounting, of approximately $43 million; and
Approximately $12 million due to the acquisition and partial-year consolidation of naughtone.

Operating earnings decreased $58.8 million, or 31.0%, over the prior year due to:

Decreased gross margin of $11.7 million due to decreased sales volumes, partially offset by an increase in gross margin percentage of 120 basis points. The increase in gross margin percentage was due primarily to incremental list price increases, net of contract price discounting, partially offset by lower volume leverage due to the outbreak of COVID-19 described above; and
Increased operating expenses of $47.1 million driven primarily by non-cash charges of $43.2 million in the current year for the impairment of goodwill and intangible assets related to Maharam, greater restructuring expenses in the current year of $11.0 million related to severance and outplacement benefits associated with workforce reductions implemented during the year, and greater special charges in the current year of $6.9 million related primarily to costs arising as a direct result of COVID-19. These increases were partially offset by lower marketing and selling expenses of approximately $16 million from the comparative period.

International Contract ("International")
(Dollars in millions)
Fiscal 2020
 
Fiscal 2019
 
Change
Net sales
$
502.8

 
$
492.2

 
$
10.6

Gross margin
168.5

 
166.9

 
1.6

Gross margin %
33.5
%
 
33.9
%
 
(0.4
)%
Operating earnings
18.2

 
57.8

 
(39.6
)
Operating earnings %
3.6
%
 
11.7
%
 
(8.1
)%

Net sales increased 2.2%, or 13.4%(*) on an organic basis, over the prior year due to:

Approximately $84 million due to the acquisition and partial-year consolidation of HAY and naughtone; offset by
Decreased sales volumes within the International segment of approximately $72 million, primarily due to the outbreak of COVID-19 and related facility shut-downs; and
The impact of foreign currency translation which decreased sales by approximately $7 million.

Operating earnings decreased $39.6 million, or 68.5%, compared to the prior year due to:

Increased operating expenses of $41.2 million driven primarily by non-cash charges of $23.2 million in the current year for the impairment of intangible assets related to HAY and naughtone and increased expenses of $21.6 million due to the acquisition and partial-year consolidation of HAY and naughtone; offset by
Increased gross margin of $1.6 million due mainly to the acquisition of HAY and naughtone offset by the decreased sales volumes due to COVID-19 as described above.


31 2020 Annual Report



Retail
(Dollars in millions)
Fiscal 2020
 
Fiscal 2019
 
Change
Net sales
$
385.6

 
$
388.5

 
$
(2.9
)
Gross margin
161.6

 
170.7

 
(9.1
)
Gross margin %
41.9
 %
 
43.9
%
 
(2.0
)%
Operating earnings
(148.3
)
 
5.3

 
(153.6
)
Operating earnings %
(38.5
)%
 
1.4
%
 
(39.9
)%

Net sales decreased 0.7%, both on an as reported and organic(*) basis, over the prior year due primarily to lower freight revenue in the current year.

Operating earnings decreased $153.6 million over the prior year due to:

Increased operating expenses of $144.5 million driven primarily by non-cash charges of $139.0 million in the current year for the impairment of goodwill, intangible assets and right of use assets related to DWR; and
Decreased gross margin of $9.1 million and decreased gross margin percentage of 200 basis points due primarily to higher net freight and distribution expenses.

Corporate
Corporate unallocated expenses totaled $39.2 million for fiscal 2020a decrease of $10.1 million from fiscal 2019. The decrease was driven primarily by lower special charges related to third-party consulting costs for the Company's profit optimization initiatives, as well as transition costs incurred in the prior year related to the retirement of the Company's previous CEO.

(*) 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
(In millions)
2020
 
2019
Cash provided by (used in):
 
 
 
Operating activities
$
221.8

 
$
216.4

Investing activities
$
(168.1
)
 
$
(165.0
)
Financing activities
$
244.0

 
$
(91.9
)
Effect of exchange rate changes
$
(2.9
)
 
$
(4.2
)
Net change in cash and cash equivalents
$
294.8

 
$
(44.7
)