MILLERKNOLL, INC. The following is management's discussion and analysis of certain significant factors that affected the Company's financial condition, earnings and cash flows during the periods included in the accompanying Condensed Consolidated Financial Statements and should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year endedMay 30, 2020 . References to "Notes" are to the footnotes included in the accompanying Condensed Consolidated Financial Statements. Business Overview The Company researches, designs, manufactures, sells, and distributes furnishings and accessories, for use in various environments including office, healthcare, educational, and residential settings, and provides related services that support companies all over the world. The Company's products are sold through independent contract office furniture dealers as well as the following channels: owned contract office furniture dealers, direct customer sales, independent retailers, owned retail studios and stores, direct-mail catalogs and the Company's e-commerce platforms. The following is a summary of results for the three months endedFebruary 27, 2021 : •Net sales were$590.5 million and orders were$566.1 million , representing a decrease of 11.3% and 13.1%, respectively, when compared to the same quarter of the prior year. The decrease in net sales was driven primarily by decreased sales volumes in the North America Contract segment, partially offset by increased demand within the Retail segment and incremental list price increases. On an organic basis, which excludes the impact of foreign currency translation, net sales were$582.1 million (*) and orders were$557.6 million , representing a decrease of 12.6%(*) and 14.4%, respectively, when compared to the same quarter of the prior year. •Gross margin was 39.1% as compared to 36.5% for the same quarter of the prior year. The increase in gross margin was driven primarily by favorable channel and product mix combined with incremental list price increases, partially offset by lower overhead leverage due to decreased volumes. •Operating expenses decreased by$17.1 million or 8.9% as compared to the same quarter of the prior year. The decrease in operating expenses was driven primarily by lower restructuring & special charges, lower warranty costs, lower marketing and selling costs, lower compensation and benefit costs, and lower travel costs.
•The effective tax rate was 22.9% compared to 22.4% for the same quarter of the prior year.
•Diluted earnings per share were$0.70 , a 9.4% increase as compared to the prior year. Excluding restructuring expenses and other special charges, which consisted primarily of a non-recurring gain from a favorable legal settlement, adjusted diluted earnings per share were$0.65 (*), a 12.2%(*) decrease as compared to prior year adjusted diluted earnings per share.
(*) Non-GAAP measurements; see accompanying reconciliations and explanations under the heading "Reconciliation of Non-GAAP Financial Measures."
The following summary includes the Company's view on the economic environment in which it operates:
•The Company's Retail segment supports a range of furniture categories aimed at
the home environment. Several of these categories, including Upholstery,
Outdoor, Storage, and Accessories, saw a ramp-up in demand during the first two
quarters of fiscal 2021 and this continued into the third quarter of fiscal
2021.
•The disruption from the COVID-19 pandemic has adversely impacted our fiscal
2021 results as contract furniture industry order trends, as reported by the
Business and Institutional Furniture Manufacturers
Herman Miller, Inc. and Subsidiaries 25
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Association ("BIFMA"), have highlighted near-term demand pressures from the
slowdown in economic activity from the pandemic in our North America Contract
segment. Our International Contract segment has also been impacted, although
many of the markets internationally have shown signs of faster economic
recovery.
•The Company is monitoring the resolution of various trade policy negotiations
between the U.S. and key trading partners as well as the impact of the U.K. exit
from the European Union ("Brexit"). These negotiations create uncertainty in key
markets, particularly the U.K. , continental Europe and China , which, if
unresolved in the near term, could negatively impact customer demand.
•The Company continues to navigate the impact of global tariffs. The Company
believes, based upon existing circumstances, that pricing, strategic sourcing
actions and profit optimization initiatives have fully offset the current level
of tariffs imposed on imports from China .
•The Company's financial performance is sensitive to changes in certain input
costs, including steel and steel component parts. The market price of steel in
the third quarter of fiscal 2021 was higher than the same period of the prior
year and negatively impacted consolidated results on a year-over-year basis.
While the impact to the current quarter was nominal, the price of steel
continues to increase and is expected to unfavorably impact consolidated gross
margin in the fourth quarter of fiscal 2021. However, ongoing cost reduction
initiatives and a planned price increase in the first quarter of fiscal 2022
will help offset these pressures over time.
The remaining sections within Item 2 include additional analysis of the three
and nine months ended February 27, 2021 , including discussion of significant
variances compared to the prior year periods.
COVID-19 Update
The Company continues to respond to the challenges brought about by the COVID-19
pandemic. Workplace restrictions are regionally applied based on the
recommendations of local government and health authorities. While demand for the
Company's products and services, particularly in the Contract channel of the
business, has been adversely impacted, our multi-channel go-to-market approach
has enabled us to serve customers where, and how, they need to be served. In
addition, the investments we've made in people, technology, and products have
positioned us well to capitalize on emerging opportunities as our customers'
needs have changed throughout the COVID-19 crisis. This has allowed for our
Retail business to take advantage of the unanticipated emerging work-from-home
trend as well as "home is my castle" trends as consumers are focusing on and
upgrading their broader home environments. Despite this, the duration of this
virus, the impact on our supply chain, future demand for our products, and
related impact remain difficult to estimate with any degree of certainty.
Employee Safety and Health
The health and well-being of employees remains top of mind. We are taking a
regional approach to restrictions based on active COVID-19 case levels and local
health authority recommendations. Contact tracing is active in all regions to
help track and control the spread of the virus. We also continue to employ a
variety of other safety measures including domestic and international travel
restrictions, extensive cleaning protocols, temperature and health screenings,
personal protective equipment, and visitor safety guidelines. We will be working
with our employees around the globe to understand vaccine distribution and
create time for every employee to be vaccinated if they wish to do so.
Customer Focus
The digital investments we've made allowed us to pivot quickly and capitalize on
a new set of opportunities when our customers' purchasing behaviors changed.
These investments include a reimagined Design Within Reach website, a Work from
Home landing page on Herman Miller's website, a Work from Home online assessment
tool, and new digital platforms that are creating greater efficiencies for
contract and dealer audiences. Our first Herman Miller retail seating concept
stores are open in Los Angeles , New York Hudson Yards, Tokyo , and Austin , with a
fifth store soon to be open in Greenwich, CT . In the early days, these stores
have exceeded our initial revenue and operating profit expectations as we seek
to educate customers about the health benefits of ergonomic seating. We remain
uniquely positioned to serve our customers through multiple channels with the
most comprehensive portfolio of products in the industry.
26 Form 10-Q
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As our customers develop their post-pandemic work plans, there is a notable
shift to work being done from a number of places, with the office as a
destination - a place where employees want to be rather than are required to be.
Herman Miller Group is ready to capture the many opportunities caused by this
shift as our commercial customers rethink their real estate portfolios, redesign
their workplaces, and seek to provide healthy and productive home work
environments.
Manufacturing and Retail Operations
Manufacturing facilities continue to operate at near-normal capacity with
enhanced safety precautions. Nearly all retail studios and stores are open in
some capacity; with some open to the public, some in limited capacity, and
others by appointment only. All facilities operate within the context of and are
subject to local guidance from government and health authorities and we will
continue to adjust to ensure we are acting in accordance with these guidelines.
Cost Reductions
In fiscal 2020, the Company implemented a range of actions aimed at temporarily
reducing costs and preserving liquidity. In fiscal 2021, the Company, together
with its Board of Directors, made the decision to move forward with several
restorative actions. This included eliminating the 10% reduction in
compensation, the introduction of a modified bonus program and re-establishing a
quarterly cash dividend program. In addition, the Company has reinstated the
previously suspended employer-paid retirement plan contributions in the fourth
quarter of fiscal 2021, and has also elected to make a catch-up contribution for
the employer-paid retirement plan contributions that were suspended for a
majority of fiscal 2020. Despite these various reinstatements, the Company
continues to tightly control operating expenses in the face of lingering
economic uncertainty.
Reconciliation of Non-GAAP Financial Measures
This report contains references to organic net sales 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
restructuring expenses and other special charges or gains, including related
taxes. Restructuring expenses in the current period included actions involving
facilities consolidation and optimization and targeted workforce reductions,
while in the comparative period included actions involving facilities
consolidation and optimization and costs associated with an early retirement
program.
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 "U.S. 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.
Herman Miller, Inc. and Subsidiaries 27
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The following tables reconcile net sales to organic net sales for the periods
ended as indicated below:
Three Months Ended Three Months Ended
February 27, 2021 February 29, 2020
(In millions) North America International Retail Total North America International Retail Total
Net sales, as reported $ 268.2 $ 165.7 $ 156.6 $ 590.5 $ 413.4 $ 156.1 $ 96.2 $ 665.7
% change from PY (35.1) % 6.1 % 62.8 % (11.3) %
Adjustments
Currency translation effects
(1) (0.5) (7.8) (0.1) (8.4) - - - -
Net sales, organic $ 267.7 $ 157.9 $ 156.5 $ 582.1 $ 413.4 $ 156.1 $ 96.2 $ 665.7
% change from PY (35.2) % 1.2 % 62.7 % (12.6) %
(1) Currency translation effects represent the estimated net impact of translating current period sales and orders using the average exchange rates applicable to the comparable prior year period.
Nine Months Ended Nine Months Ended
February 27, 2021 February 29, 2020
(In millions) North America International Retail Total North America International Retail Total
Net sales, as reported $ 930.2 $ 487.4 $ 426.0$ 1,843.6 $ 1,322.5 $ 388.1 $ 300.2 $ 2,010.8 % change from PY (29.7) % 25.6 % 41.9 % (8.3) % Adjustments Acquisitions (10.6) (87.3) - (97.9) - - - - Currency translation effects (1) (0.3) (8.1) (0.1) (8.5) - - -
-
Net sales, organic$ 919.3 $ 392.0 $
425.9
$ 2,010.8 % change from PY (30.5) % 1.0 % 41.9 % (13.6) %
(1) Currency translation effects represent the estimated net impact of translating current period sales and orders using the average exchange rates applicable to the comparable prior year period.
The following table reconciles earnings per share - diluted to adjusted earnings per share - diluted for the three and nine months ended:
Three Months Ended Nine Months Ended
February 29, February 29,
February 27, 2021 2020 February 27, 2021 2020
Earnings per share - diluted $ 0.70 $
0.64
Less: Gain on consolidation of equity method investment - - - (0.51) Less: Gain on legal settlement, after tax (0.05) - (0.05) - Add: Special charges, after tax - 0.06 0.01 0.08 Add: Restructuring expenses, after tax - 0.04 0.02 0.12
Adjusted earnings per share - diluted
Weighted average shares outstanding (used for calculating adjusted earnings per share) - diluted 59,602,638 59,218,101 59,212,447 59,266,929 Note: The adjustments above are net of tax. For the three and nine months endedFebruary 27, 2021 andFebruary 29, 2020 , the tax impact of the adjustments were immaterial. 28 Form 10-Q --------------------------------------------------------------------------------
Analysis of Results for Three and Nine Months The following table presents certain key highlights from the results of operations for the three and nine months ended:
Three Months Ended Nine Months Ended
(In millions, except share February 27, February 29, February 27, February 29,
data) 2021 2020 % Change 2021 2020 % Change
Net sales $ 590.5 $ 665.7 (11.3) % $ 1,843.6 $ 2,010.8 (8.3) %
Cost of sales 359.6 422.4 (14.9) % 1,118.4 1,265.9 (11.7) %
Gross margin 230.9 243.3 (5.1) % 725.2 744.9 (2.6) %
Operating expenses 175.8 192.9 (8.9) % 503.7 571.9 (11.9) %
Operating earnings 55.1 50.4 9.3 % 221.5 173.0 28.0 %
Gain on consolidation of
equity method investment - - n/a - 30.5 n/a
Other (income) expenses, net (1.5) 2.8 (153.6) % 2.2 7.5 (70.7) %
Earnings before income taxes
and equity income 56.6 47.6 18.9 % 219.3 196.0 11.9 %
Income tax expense 13.0 10.6 22.6 % 49.9 35.8 39.4 %
Equity (loss) income from
nonconsolidated affiliates,
net of tax (0.3) 0.3 (200.0) % 0.1 3.7 (97.3) %
Net earnings 43.3 37.3 16.1 % 169.5 163.9 3.4 %
Net earnings (loss)
attributable to redeemable
noncontrolling interests 1.8 (0.4) n/a 3.8 (0.6) n/a
Net earnings attributable to
Herman Miller, Inc. $ 41.5 $ 37.7 10.1 % $ 165.7 $ 164.5 0.7 %
Earnings per share - diluted $ 0.70 $ 0.64 9.4 % $ 2.80 $ 2.78 0.7 %
Orders $ 566.1 $ 651.7 (13.1) % $ 1,751.9 $ 2,003.3 (12.5) %
Backlog $ 379.0 $ 411.2 (7.8) %
The following table presents select components of the Company's Condensed Consolidated Statements of Comprehensive Income as a percentage of net sales, for the three and nine months ended:
Three Months Ended Nine Months Ended
February 27, 2021 February 29, 2020 February 27, 2021 February 29, 2020
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 60.9 63.5 60.7 63.0
Gross margin 39.1 36.5 39.3 37.0
Operating expenses 29.8 29.0 27.3 28.4
Operating earnings 9.3 7.6 12.0 8.6
Gain on consolidation of equity method
investment - - - 1.5
Other (income) expenses, net (0.3) 0.4 0.1 0.4
Earnings before income taxes and equity
income 9.6 7.2 11.9 9.7
Income tax expense 2.2 1.6 2.7 1.8
Equity (loss) income from nonconsolidated
affiliates, net of tax (0.1) - - 0.2
Net earnings 7.3 5.6 9.2 8.2
Net earnings (loss) attributable to
redeemable noncontrolling interests 0.3 (0.1) 0.2 -
Net earnings attributable to Herman
Miller, Inc. 7.0 5.7 9.0 8.2
Herman Miller, Inc. and Subsidiaries 29--------------------------------------------------------------------------------Net Sales The following charts present graphically the primary drivers of the year-over-year change in net sales for the three and nine months endedFebruary 27, 2021 . The amounts presented in the graphs are expressed in millions and have been rounded. [[Image Removed: mlhr-20210227_g2.jpg]] [[Image Removed: mlhr-20210227_g3.jpg]] Net sales decreased$75.2 million or 11.3% in the third quarter of fiscal 2021 compared to the third quarter of fiscal 2020. The following items contributed to the change: •Increased sales volumes within the Retail segment of approximately$57 million which were driven primarily by increased demand within the segment's eCommerce channel. •Foreign currency translation had a positive impact on net sales of approximately$8 million . •Incremental list price increases, net of discounting, of approximately$6 million . •Decreased sales volumes within the North America Contract ("NAC") segment of approximately$146 million , primarily due to the impact of the outbreak of COVID-19. Net sales decreased$167.2 million or 8.3% in the first nine months of fiscal 2021 compared to the first nine months of fiscal 2020. The following items led to the change: •Increased sales volumes within the Retail segment of approximately$119 million which were driven primarily by increased demand within the segment's eCommerce channel. •Increase of approximately$98 million due to the acquisitions of HAY and naughtone. •Incremental list price increases, net of discounting, of approximately$18 million . •Foreign currency translation had a positive impact on net sales of approximately$9 million . •Decreased sales volumes within the NAC segment of approximately$411 million , primarily due to the impact of the outbreak of COVID-19. Gross Margin Gross margin was 39.1% in the third quarter of fiscal 2021 as compared to 36.5% in the third quarter of fiscal 2020. The following factors summarize the major drivers of the year-over-year change in gross margin percentage: •A favorable shift in channel mix increased gross margin by approximately 200 basis points. •Product mix and ongoing profitability improvement efforts increased gross margin by approximately 120 basis points. •Incremental list price increases, net of discounting, increased gross margin by approximately 70 basis points. •Lower special charges increased gross margin by approximately 30 basis points due to special charges in the prior year related to the initial purchase accounting of HAY. •Lower overhead and labor leverage partially offset by lower overhead spend decreased gross margin by approximately 160 basis points. 30 Form 10-Q -------------------------------------------------------------------------------- Gross margin was 39.3% for the nine month period endedFebruary 27, 2021 as compared to 37.0% for the same period of the prior fiscal year. The following factors summarize the major drivers of the year-over-year change in gross margin percentage: •A favorable shift in channel mix increased gross margin by approximately 170 basis points. •Product mix, material performance and ongoing profitability improvement efforts increased gross margin by approximately 70 basis points. •Incremental list price increases, net of discounting, increased gross margin by approximately 60 basis points. •Lower overhead leverage decreased gross margin by approximately 70 basis points. Operating Expenses The following charts present graphically the primary drivers of the year-over-year change in operating expenses for the three and nine months endedFebruary 27, 2021 . The amounts presented in the graphs are expressed in millions and have been rounded. [[Image Removed: mlhr-20210227_g4.jpg]] [[Image Removed: mlhr-20210227_g5.jpg]]Herman Miller, Inc. and Subsidiaries 31
-------------------------------------------------------------------------------- Operating expenses decreased by$17.1 million or 8.9% in the third quarter of fiscal 2021 compared to the prior year period. The following factors contributed to the change: •Restructuring expenses and special charges decreased approximately$8 million . •Warranty costs decreased approximately$5 million due to lower sales volumes and favorable claims experience within the North America Contract segment. •Lower marketing and selling costs of approximately$4 million primarily within the North America Contract segment due to lower sales volume. •Travel costs were approximately$5 million lower due to decreased travel as a result of COVID-19. •Compensation and benefit costs decreased approximately$2 million due to benefits from the workforce actions initiated in the fourth quarter of fiscal 2020 and the temporary suspension of certain employee benefits of approximately$6 million , partially offset by incremental headcount added during fiscal 2021 and increased variable compensation. •Foreign currency translation had a negative impact on operating expenses of approximately$2 million . •IT costs increased approximately$2 million driven primarily by increased investments within the Company's digital and eCommerce platforms.
Operating expenses decreased by
•Lower marketing and selling costs of approximately$28 million primarily within the North America Contract segment due to lower sales volume. •Compensation and benefit costs decreased approximately$23 million due primarily to lower headcount associated with the reduction in workforce actions initiated in the fourth quarter of fiscal 2020, as well as temporary wage reductions that were in effect during the first quarter of the year. •Restructuring expenses and special charges decreased approximately$14 million . •Travel costs were approximately$14 million lower due to decreased travel as a result of COVID-19. •Warranty costs decreased approximately$9 million due to lower sales volumes and claims experience within the North America Contract segment. •Lower studio costs of approximately$6 million driven by lower lease expense. •The acquisition of HAY and naughtone increased operating expenses by approximately$23 million . Other Income/Expense During the three months endedFebruary 27, 2021 , net other income was$1.5 million . This compares to net other expense of$2.8 million in the same period of the prior year, representing a favorable change of$4.3 million . During the nine months endedFebruary 27, 2021 , net other expense was$2.2 million . This compares to net other expense of$7.5 million in the same period of the prior year, representing a decrease of$5.3 million . The decrease in expense for both the three and nine months endedFebruary 27, 2021 was primarily the result of a pre-tax gain of$4.3 million related to a legal settlement. Other income/expense in the nine months endedFebruary 29, 2020 reflected a pre-tax gain of$30.5 million related to the purchase accounting treatment of the initial equity-method investment inU.K. -based naughtone. The Company acquired the remaining shares of naughtone during the second quarter of fiscal 2020 and as a result, was required to adjust the value of the initial investment to fair value, resulting in a non-taxable gain. Income Taxes See Note 11 of the Condensed Consolidated Financial Statements for additional information. 32 Form 10-Q
-------------------------------------------------------------------------------- Operating Segment Results The business is comprised of various operating segments as defined by generally accepted accounting principles inthe 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 are North America Contract, International Contract, Retail and Corporate. For descriptions of each segment, refer to Note 16 of the Condensed Consolidated Financial Statements. The charts below present the relative mix of Net sales and Operating earnings across each of the Company's segments during the three and nine month periods endedFebruary 27, 2021 . This is followed by a discussion of the Company's results, by reportable segment. The amounts presented in the charts are in millions and have been rounded.
[[Image Removed: mlhr-20210227_g6.jpg]][[Image Removed: mlhr-20210227_g7.jpg]]
[[Image Removed: mlhr-20210227_g8.jpg]][[Image Removed: mlhr-20210227_g9.jpg]]
Herman Miller, Inc. and Subsidiaries 33 --------------------------------------------------------------------------------
North America Contract ("North America")
Three Months Ended Nine Months Ended
February 27, February 29, February 27, February 29,
(Dollars in millions) 2021 2020 Change 2021 2020 Change
Net sales $ 268.2 $ 413.4 $ (145.2) $ 930.2 $ 1,322.5 $ (392.3)
Gross margin 93.0 150.1 (57.1) 338.4 487.0 (148.6)
Gross margin % 34.7 % 36.3 % (1.6) % 36.4 % 36.8 % (0.4) %
Operating earnings 11.9 51.2 (39.3) 99.3 176.4 (77.1)
Operating earnings % 4.4 % 12.4 % (8.0) % 10.7 % 13.3 % (2.6) %
For the three month comparative period, net sales decreased 35.1%, or 35.2%(*)
on an organic basis, over the prior year period due primarily to decreased sales
volumes within the segment of approximately $146 million , primarily due to the
outbreak of COVID-19.
For the nine month comparative period, net sales decreased 29.7%, or 30.5%(*) on an organic basis, over the prior year period due to:
•Decreased sales volumes within the segment of approximately$411 million , primarily due to the outbreak of COVID-19; partially offset by •Incremental list price increases, net of discounting, of approximately$10 million ; and •Approximately$11 million due to the acquisition of naughtone.
For the three month comparative period, operating earnings decreased
•Decreased gross margin of$57.1 million due to decreased sales volumes and a decrease in gross margin percentage of 160 basis points. The decrease in gross margin percentage was due primarily to lower volume leverage due to the outbreak of COVID-19, partially mitigated by labor performance and ongoing profitability improvement efforts; partially offset by •Decreased operating expenses of$17.8 million driven primarily by lower marketing and selling expenses of approximately$5 million , lower compensation and benefit costs of approximately$6 million , lower warranty costs of approximately$5 million , and lower travel costs of approximately$2 million .
For the nine month comparative period, operating earnings decreased
•Decreased gross margin of$148.6 million due to decreased sales volumes; partially offset by •Decreased operating expenses of$71.5 million driven primarily by lower marketing and selling expenses of approximately$26 million , lower compensation and benefit costs of approximately$20 million , lower travel costs of approximately$8 million , lower warranty costs of approximately$8 million , and lower restructuring costs of approximately$4 million .
(*) Non-GAAP measurements; see accompanying reconciliations and explanations under the heading "Reconciliation of Non-GAAP Financial Measures."
34 Form 10-Q --------------------------------------------------------------------------------
International Contract ("International")
Three Months Ended Nine Months Ended
February 27, February 29, February 27, February 29,
(Dollars in millions) 2021 2020 Change 2021 2020 Change
Net sales $ 165.7 $ 156.1 $ 9.6 $ 487.4 $ 388.1 $ 99.3
Gross margin 60.0 50.8 9.2 175.6 130.9 44.7
Gross margin % 36.2 % 32.5 % 3.7 % 36.0 % 33.7 % 2.3 %
Operating earnings 22.5 11.3 11.2 70.9 37.3 33.6
Operating earnings % 13.6 % 7.2 % 6.4 % 14.5 % 9.6 % 4.9 %
For the three month comparative period, net sales increased 6.1%, or 1.2%(*) on
an organic basis, over the prior year period due primarily to the impact of
foreign currency translation which increased sales by approximately
For the nine month comparative period, net sales increased 25.6%, or 1.0%(*) on an organic basis, over the prior year period due to:
•The acquisition of HAY and naughtone which increased sales by approximately$87 million . •The impact of foreign currency translation which increased sales by approximately$8 million .
For the three month comparative period, operating earnings increased
•Increased gross margin of$9.2 million due to the increase in sales explained above, as well as increased gross margin percentage of 370 basis points due primarily to favorable changes in channel and product mix; and •Decreased operating expenses of$2.0 million driven primarily by lower special charges compared to the prior year which included the initial purchase accounting effects of HAY and lower travel costs, partially offset by unfavorable foreign currency translation impacts.
For the nine month comparative period, operating earnings increased
•Increased gross margin of$44.7 million due to the increase in sales explained above, and increased gross margin percentage of 230 basis points due primarily to favorable changes in channel and product mix; partially offset by •Increased operating expenses of$11.1 million , driven primarily by the acquisition of HAY and naughtone and partially offset by lower special charges compared to the prior year which included the initial purchase accounting effects of HAY and lower travel costs.
(*) Non-GAAP measurements; see accompanying reconciliations and explanations under the heading "Reconciliation of Non-GAAP Financial Measures."
Herman Miller, Inc. and Subsidiaries 35 --------------------------------------------------------------------------------
Retail
Three Months Ended Nine Months Ended
February 27 , February 29 ,(Dollars in millions) February 27, 2021 February 29, 2020 Change 2021 2020 Change Net sales $ 156.6 96.2$ 60.4 $ 426.0 $ 300.2 $ 125.8 Gross margin 77.9 42.4 35.5 211.2 127.0 84.2 Gross margin % 49.7 % 44.1 % 5.6 % 49.6 % 42.3 % 7.3 % Operating earnings 31.5 (1.6) 33.1 83.3 (6.4) 89.7 Operating earnings % 20.1 % (1.7) % 21.8 % 19.6 % (2.1) % 21.7 %
For the three month comparative period, net sales increased 62.8%, or 62.7%(*) on an organic basis, over the prior year period due to:
•Increased sales volumes of approximately
For the nine month comparative period, net sales increased 41.9%, both on an as reported and organic(*) basis, over the prior year period due to:
•Increased sales volumes of approximately$119 million which were driven primarily by increased demand within the segment's e-commerce channel; and •Incremental list price increases, net of discounting, of approximately$11 million ; partially offset by •Lower freight revenue of approximately$3 million .
For the three month comparative period, operating earnings increased
•Increased gross margin of$35.5 million due to the increase in sales explained above, as well as increased gross margin percentage of 560 basis points due primarily to favorable changes in channel and product mix and incremental list price increases, net of price discounting, partially offset by higher freight expenses; partially offset by •Increased operating expenses of$2.4 million driven primarily by higher marketing expenses, the opening of new locations, and higher IT costs driven by increased investments within the Company's digital and eCommerce platforms.
For the nine month comparative period, operating earnings increased
•Increased gross margin of$84.2 million due to the increase in sales explained above, as well as increased gross margin of 730 basis points due primarily to changes in channel and product mix and incremental list price increases, net of price discounting; and •Decreased operating expenses of$5.5 million driven primarily by lower studio costs.
(*) Non-GAAP measurements; see accompanying reconciliations and explanations under the heading "Reconciliation of Non-GAAP Financial Measures."
Corporate
Corporate unallocated expenses totaled
Corporate unallocated expenses totaled$32.0 million for the first nine months of fiscal 2021, a decrease of$2.3 million from the same period of fiscal 2020. The decrease was driven primarily by lower special charges in the current period. 36 Form 10-Q -------------------------------------------------------------------------------- Liquidity and Capital Resources The table below summarizes the net change in cash and cash equivalents for the nine months ended as indicated. (In millions) February 27, 2021 February 29, 2020 Cash provided by (used in): Operating activities $ 260.1 $ 191.8 Investing activities (42.9) (171.3) Financing activities (287.3) (69.8) Effect of exchange rate changes 13.5
0.7
Net change in cash and cash equivalents $ (56.6) $
(48.6)
Cash Flows - Operating Activities Cash provided by operating activities for the nine months endedFebruary 27, 2021 was$260.1 million , as compared to$191.8 million in the same period of the prior year. The increase in cash generated from operations in the current year, compared to the prior year, was primarily due to: •Prior year net earnings included a non-taxable non-cash gain on consolidation of an equity method investment of$30.5 million ; and •An increase in current liabilities in the current period of$9.7 million , driven by an increase in accounts payable and partially offset by a decrease in accrued liabilities. This compares to a decrease in current liabilities of$36.7 million in the prior year period. The decrease in the prior year period was driven primarily by a decrease in accrued liabilities and accounts payable; and •An increase in non-current liabilities in the current period of$11.0 million driven primarily by the deferral of payroll taxes as permitted under the CARES act; offset by •An increase in current assets in the current period of$6.4 million compared to a decrease in current assets of$17.8 million in the prior year period. The increase in current assets in the current period was driven by an increase in accounts receivable as sales volumes increased from the end of fiscal 2020. The decrease in current assets in the prior year period was driven by a decrease in accounts receivable and partially offset by an increase in prepaid expenses. Cash Flows - Investing Activities Cash used in investing activities for the nine months endedFebruary 27, 2021 was$42.9 million , as compared to$171.3 million in the same period of the prior year. The decrease in cash outflow in the current year, compared to the prior year, was primarily due to: •Prior year cash outflow of$111.2 million for the purchase of naughtone and HAY; •A decrease in capital expenditures of$13.7 million due to reduced spending as a result of COVID-19; and •Proceeds from the sale of the Company's manufacturing facility inChina and office facility in theUnited Kingdom in the current year of$11.5 million . At the end of the third quarter of fiscal 2021, there were outstanding commitments for capital purchases of$17.0 million . The Company plans to fund these commitments through a combination of cash on hand and cash flows from operations. The Company expects full-year capital purchases to be between$55 million and$65 million , which will be primarily related to investments in the Company's facilities and equipment. This compares to full-year capital spending of$69.0 million in fiscal 2020. Cash Flows - Financing Activities Cash used in financing activities for the nine months endedFebruary 27, 2021 was$287.3 million , as compared to$69.8 million in the same period of the prior year. The increase in cash outflow in the current year, compared to the prior year, was primarily due to repayments of$265.0 million on the Company's credit facility inJune 2020 . After the end of the quarter endedFebruary 27, 2021 , the Company repaid$50 million of private placement notes dueMarch 1, 2021 with available cash on hand. Herman Miller, Inc. and Subsidiaries 37 -------------------------------------------------------------------------------- Sources of Liquidity In addition to steps taken to protect its workforce and manage business operations, the Company has taken actions to safeguard its capital position in the current environment. The Company is closely managing spending levels, capital investments, and working capital, and has temporarily suspended open market share repurchase activity as part of managing cash flows. For more information on current cost reductions, refer to the COVID-19 Update section above. At the end of the third quarter of fiscal 2021, the Company had a well-positioned balance sheet and liquidity profile. In addition to cash flows from operating activities, the Company has access to liquidity through credit facilities, cash and cash equivalents, and short-term investments. These sources have been summarized below. For additional information, refer to Note 14 to the Condensed Consolidated Financial Statements. (In millions) February 27, 2021 May 30, 2020 Cash and cash equivalents $ 397.4 $ 454.0 Marketable securities 7.5 7.0 Availability under syndicated revolving line of credit 264.8 0.6 Total liquidity $ 669.7 $ 461.6 Of the cash and cash equivalents noted above at the end of the third quarter of fiscal 2021, the Company had$192.6 million of cash and cash equivalents held outsidethe United States . In addition, the Company had marketable securities of$7.5 million held by one of its international wholly-owned subsidiaries. The Company's syndicated revolving line of credit, which expires onAugust 28, 2024 , provides the Company with up to$500 million in revolving variable interest borrowing capacity and includes an "accordion feature" allowing the Company to increase, at its option and subject to the approval of the participating banks, the aggregate borrowing capacity of the facility by up to$250 million . Outstanding borrowings bear interest at rates based on the prime rate, federal funds rate, LIBOR or negotiated rates as outlined in the agreement. Interest is payable periodically throughout the period if borrowings are outstanding.
As of
The subsidiary holding the Company's marketable securities is taxed as aUnited States taxpayer at the Company's election. Consequently, for tax purposes, allUnited States tax impacts for this subsidiary have been recorded. The Company intends to repatriate$7.7 million in cash held in certain foreign jurisdictions over the next two years and as such has recorded a deferred tax liability related to foreign withholding taxes on these future dividends received in theU.S. from foreign subsidiaries of$0.9 million . A significant portion of this cash was previously taxed under theU.S. Tax Cuts and Jobs Act (TCJA) one-timeU.S. tax liability on undistributed foreign earnings. The Company intends to remain indefinitely reinvested in the remaining undistributed earnings outside theU.S. The Company believes that its financial resources will allow it to manage the impact of COVID-19 on business operations for the foreseeable future which could include materially reduced revenue and profits. The Company will continue to evaluate its financial position in light of future developments, particularly those relating to COVID-19. Contractual Obligations Contractual obligations associated with ongoing business and financing activities will require cash payments in future periods. A table summarizing the amounts and estimated timing of these future cash payments as ofMay 30, 2020 was provided in the Company's annual report on Form 10-K for the year endedMay 30, 2020 . There have been no material changes in such obligations since that date, except for the Company's repayment of$50 million in private placement notes at maturity with available cash on hand.
Guarantees
See Note 13 to the Condensed Consolidated Financial Statements.
38 Form 10-Q -------------------------------------------------------------------------------- Variable Interest Entities See Note 18 to the Condensed Consolidated Financial Statements.
Contingencies
See Note 13 to the Condensed Consolidated Financial Statements.
Critical Accounting Policies
The Company strives to report financial results clearly and understandably. The Company follows accounting principles generally accepted inthe United States in preparing its consolidated financial statements, which require certain estimates and judgments that affect the financial position and results of operations for the Company. The Company continually reviews the accounting policies and financial information disclosures. A summary of the more significant accounting policies that require the use of estimates and judgments in preparing the financial statements is provided in the Company's Annual Report on Form 10-K for the year endedMay 30, 2020 . New Accounting Standards See Note 2 to the Condensed Consolidated Financial Statements. Safe Harbor Provisions Certain statements in this report are not historical facts but are "forward-looking statements" as defined under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act, as amended, that are based on management's beliefs, assumptions, current expectations, estimates, and projections about the office furniture industry, the economy, and the Company itself. Words like "anticipates," "believes," "confident," "estimates," "expects," "forecasts," likely," "plans," "projects," "could," and "should," variations of such words, and similar expressions identify such forward-looking statements. These statements do not guarantee future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict with regard to timing, extent, likelihood, and degree of occurrence. These risks include, without limitation, the success of our growth strategy, our success in initiatives aimed at achieving long-term profit optimization goals, employment and general economic conditions, the pace of economic recovery in theU.S. and in our International markets, the increase in white-collar employment, the willingness of customers to undertake capital expenditures, the types of products purchased by customers, competitive-pricing pressures, the availability and pricing of raw materials, our reliance on a limited number of suppliers, our ability to expand globally given the risks associated with regulatory and legal compliance challenges and accompanying currency fluctuations, changes in future tax legislation or interpretation of current tax legislation, the ability to increase prices to absorb the additional costs of raw materials, changes in global tariff regulations, the financial strength of our dealers and the financial strength of our customers, our ability to locate new retail studios, negotiate favorable lease terms for new and existing locations and implement our studio portfolio transformation, our ability to attract and retain key executives and other qualified employees, our ability to continue to make product innovations, the success of newly-introduced products, our ability to serve all of our markets, possible acquisitions, divestitures or alliances, our ability to integrate and benefit from acquisitions and investments, the pace and level of government procurement, the outcome of pending litigation or governmental audits or investigations, political risk in the markets we serve, natural disasters, public health crises, disease outbreaks, and other risks identified in our filings with theSecurities and Exchange Commission . Therefore, actual results and outcomes may materially differ from what we express or forecast. Furthermore,Herman Miller, Inc. , undertakes no obligation to update, amend or clarify forward-looking statements.Herman Miller, Inc. and Subsidiaries 39 --------------------------------------------------------------------------------
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