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Article by DailyStocks_admin    (01-30-08 06:38 AM)

The Daily Magic Formula Stock for 01/29/2008 is Herman Miller Inc. According to the Magic Formula Investing Web Site, the ebit yield is 12% and the EBIT ROIC is 75-100 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW

General Development of Business

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 companies all over the world. The company’s products are sold primarily to or through independent contract office furniture dealers. Through research, the company seeks to define and clarify customer needs and problems existing in its markets and to design, through innovation where appropriate and feasible, products, systems, and services as solutions to such problems. Ultimately, the company seeks to enhance the performance of human habitats worldwide, making its customers’ lives more productive, rewarding, delightful and meaningful.

Herman Miller, Inc. was incorporated in Michigan in 1905. One of the company’s major plants and its 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, the term “company” includes Herman Miller, Inc., its predecessors and majority-owned 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.
Financial Information about Segments

Information relating to segments is provided in Note 20 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, and distribution of office furniture systems, products, and related services. Most of these systems and products are designed to be used together.

The company is a leader in design and development of furniture and furniture systems. This leadership is exemplified by the innovative concepts introduced by the company in its modular systems (including Action Office®, Q™ System, Ethospace®, and Resolve®). The company also offers a broad array of seating (including Aeron®, Mirra®, Celle™, Equa®, Ergon®, and Ambi® office chairs), storage (including Meridian® filing products), wooden casegoods (including Geiger® products), and freestanding furniture products (including Passage® and Abak™). During fiscal 2006 the company introduced two additional furniture platforms; My Studio Environments™ and Vivo Interiors™. The Foray TM chair, an executive task chair made by the company’s Geiger subsidiary, and Leaf TM , an innovative LED desk lamp, were also introduced during fiscal 2006. These new product offerings were made available for order in fiscal 2007.

The company’s products are marketed worldwide by its own sales staff, its owned dealer network, independent dealers and retailers, and via the Internet. Salespersons work with dealers, the design and architectural community, and directly with end-users. Independent dealerships concentrate on the sale of Herman Miller products and some complementary product lines of other manufacturers. It is estimated that approximately 71 percent of the company’s sales in the fiscal year ended June 2, 2007 were made to or through independent dealers. The remaining sales were made directly to end-users, including federal, state, and local governments, and several major corporations, by the company’s own sales staff, its owned dealer network, or independent retailers.

The company is also a recognized leader within its industry for the use, development, and integration of customer-centered technologies that enhance the reliability, speed, and efficiency of its 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 and casegood products, and related services are used in (1) office/institution 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 the United States, Canada, Europe, and Asia. To date, the company 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 components, plastics, 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.

Patents, Trademarks, Licenses, Etc.
The company has 218 active United States utility patents on various components used in its products and 76 active United States design patents. Many of the inventions covered by the United States patents also have been patented in a number of foreign countries. Various trademarks, including the name and style “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 adversely affected by the loss of any thereof, except for Herman Miller®, Herman Miller Circled Symbolic M®, Geiger®, Action Office®, Ethospace®, Aeron®, Mirra®, Eames®, and PostureFit®. It is estimated that the average remaining life of such patents and trademarks is approximately 6 years and 10 years, respectively.

Working Capital Practices
Information concerning the company’s inventory levels relative to its sales volume can be found under the Executive Overview section in Item 7 of this report. 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
It is estimated that no single dealer accounted for more than 4 percent of the company’s net sales in the fiscal year ended June 2, 2007. It is also estimated that the largest single end-user customer accounted for approximately 8 percent of the company’s net sales with the 10 largest customers accounting for approximately 18 percent of net sales. The company does not believe that its business depends on any single or small number of customers, the loss of which would have a materially adverse effect upon the company.

Backlog of Unfilled Orders
As of June 2, 2007, the company’s backlog of unfilled orders was $288.0 million. At June 3, 2006, the company’s backlog totaled $238.2 million. It is expected that substantially all the orders forming the backlog at June 2, 2007, 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 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 increase its list prices during the term of the Multiple Award Schedule Contract period.

Competition
All aspects of the company’s business are highly competitive. The company competes largely on design, product and service quality, speed of delivery, and product pricing. Though the company is one of the largest office furniture manufacturers in the world, in several markets, it competes with many smaller companies and with several manufacturers that have greater resources and sales. In the United States, the company’s most significant competitors are Haworth, HNI Corporation, Kimball International, Knoll, and Steelcase.

Research, Design and Development
The company draws great competitive strength from its research, design and development programs. Accordingly, the company believes that its research and design activities are of significant importance. Through research, the company seeks to define and clarify customer needs and problems and to design, through innovation where feasible and appropriate, products and services as solutions to these customer needs and problems. The company uses both internal and independent research and design resources. Exclusive of royalty payments, the company spent approximately $42.1 million, $36.7 million, and $32.7 million, on research and development activities in fiscal 2007, 2006, and 2005, respectively. Generally, royalties are paid to designers of the company’s products as the products are sold and are not included in research and development costs since they are variable based on product sales.

Environmental Matters
The company continues to rigorously reduce, recycle, and reuse solid waste generated by its manufacturing processes and the company’s efforts and accomplishments have been widely recognized. 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.

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, and compensation planning and counseling. There have been no work stoppages or labor disputes in the company’s history, and its relations with its employees are considered good. Approximately 7 percent of the company’s employees are covered by collective bargaining agreements, most of whom are employees of its Integrated Metal Technology, Inc., and Herman Miller Limited (U.K.) subsidiaries.

As of June 2, 2007, the company employed 6,373 full-time and 201 part-time employees, representing a 5.3 percent increase and a 6.9 percent increase, respectively, compared with June 3, 2006. In addition to its employee work force, the company uses temporary purchased labor to meet uneven demand in its manufacturing operations.
Information about International Operations

The company’s sales in international markets primarily are made to office/institutional customers. Foreign sales consist mostly of office furniture products such as Ethospace, Abak, Aeron, Mirra, and other seating and storage products. The company conducts business in the following major international markets: Europe, Canada, Latin America, and the Asia/Pacific region. In certain foreign markets, the company’s products are offered through licensing of foreign manufacturers on a royalty basis.

The company’s products currently sold in international markets are manufactured by wholly owned subsidiaries in the United States, the United Kingdom, and China. Sales are made through wholly owned subsidiaries or branches in Canada, France, Germany, Italy, Japan, Mexico, Australia, Singapore, China, India, and the Netherlands. The company’s products are offered in the Middle East, South America, and Asia through dealers.

In several other countries, the company licenses manufacturing and selling rights. Historically, these licensing arrangements have not required a significant investment of funds or personnel by the company and, in the aggregate, have not produced material net earnings for the company.

Additional information with respect to operations by geographic area appears in Note 20, of the Notes to 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.

CEO BACKGROUND

Mr. Goeman joined Herman Miller’s New Product Development arena in 1980, and during his 28 years with the company he has held a variety of new product design and development leadership positions. Mr. Goodson was Senior Vice President of the company’s seating procurement groups from 1997 to 2001, President of Herman Miller’s Integrated Metal Technology, Miltech, and Powder Coat Technologies subsidiaries from 1990 to 1997, and Director of Operations at one of the company’s West Michigan facilities from 1987 to 1990. Mr. Lock was Senior Vice President for People Services from 2000 to 2003, Vice President for Integration from 1998 to 2000, and Vice President of International Human Resources from 1997 to 1998. Ms. Manos joined Herman Miller in 2002 and prior to this, she served as Vice President of Global Marketing and Global Product Marketing & Development at Haworth, Inc. for five years. Ms. Nickels joined Herman Miller in 2000 and prior to this was Chief Financial Officer of Universal Forest Products, Inc., for seven years. Mr. Nowicki was the Vice President of Finance for International Operations from 2000 to 2003; before this, he served in various financial functions within the company. Mr. Portlock was President of European Operations from 2000 to 2002, President of Northern European Operations from 1997 to 2000, U.K. Managing Director of Operations from 1993 to 1997, and U.K. Sales and Marketing Director from 1989 to 1993. Mr. Vranian was Vice President of Product Management and Marketing from 1998 to 2001, Vice President of Design, Development, and Marketing for Miller SQA from 1995 to 1998; prior to this, he served in various product development, marketing and finance roles within the company.

COMPENSATION

To ensure that executive compensation is competitive in the marketplace, the Committee benchmarks our compensation programs relative to general industry pay practices. The Committee chooses to benchmark compensation levels against industrial companies in general as it minimizes the potential volatility of market pay data due to changes in database/survey participation or mergers/acquisitions; lessens the impact that a single entity can have on the overall data; provides a more consistent result; and better reflects the market in which the Company competes for executive talent.

Towers Perrin annually presents the Committee with benchmarking data, market practices and trends to provide appropriate context for the Committee’s deliberations. The CEO makes recommendations to the Committee regarding the compensation package for each of the Corporate Officers (other than himself). The CEO’s recommendations are based on the Towers Perrin information, his evaluation of the individual’s performance and other factors. Based on the Committee’s review of the information from Towers Perrin, the recommendations of the CEO and their own judgment of the relative performance of both the Company and its executives and of the market practices, the Committee determines the appropriate compensation for Corporate Officers (other than the CEO) and makes a recommendation to the full board for the CEO compensation. The Board of Directors determines the compensation of the CEO.

Towers Perrin in 2007 used the following survey sources when analyzing the market competitiveness pay levels of Corporate Officers; Towers Perrin Executive Compensation Database, Watson Wyatt Top Management Compensation Report, and the Mercer Executive Database (collectively these are referred to as “Published Survey Data”). Towers Perrin uses a regression analysis and aging to make allowances for time differences in the data and to align the data so that it can be compared both with companies with $2 billion in revenue and with companies having revenues equivalent to the operations managed by individual NEOs. In addition, in setting the 2007 compensation of Corporate Officers, including the NEOs, the Committee used a specifically selected comparator group of companies to confirm the Published Survey Data supplied by Towers Perrin. The companies in this comparator group were: Whirlpool, Kellogg, Stryker, Steelcase, Universal Forest Products, HNI, Furniture Brands International, La-Z-Boy, Spartan Stores, Hillenbrand Industries, Kimball International, Wolverine World Wide, Perrigo, Ethan Allen Interiors, Tempur Pedic International, Knoll and Select Comfort.

Each NEO position has its base salary, target total cash and target total direct compensation compared relative to the 25th, 50th (market median) and 75th percentile of the survey data of a comparable benchmark position. Each of the compensation elements is explained in more detail below. Positions are benchmarked based upon comparability of responsibilities and the annual revenues of the operations managed. The Committee uses the Published Survey Data for benchmarking purposes because it believes the competitive market for executive talent in which the Company operates is the general corporate talent market, not just the office furniture or West Michigan talent markets.

The Committee annually reviews executive pay tally sheets prepared by Towers Perrin for Corporate Officers. The tally sheets reflect the total compensation to the NEOs from all sources of compensation, including payments under severance or change in control scenarios. The Committee uses the tally sheets to help it determine that the Company’s compensation program is consistent with market norms and with our compensation philosophy and corporate values.

The Committee has determined that total compensation for each NEO in fiscal 2007 was appropriate and reasonable. The Committee has also determined that the Company’s compensation program operates in a manner that is consistent with the Company’s overall compensation philosophy.

Elements of the Compensation Program

Our Corporate Officer compensation package includes five distinct elements:

1. Base Salary
2. Annual Executive Incentive Cash Bonus
3. Long-Term Equity Incentives
4. Retirement and Health Benefits
5. Perquisites and other executive compensation plans

These five elements together form an executive’s total compensation package. The first two elements form an executive’s total cash compensation and the first three elements form an executive’s total direct compensation package. It is the Company’s goal to align the compensation packages with prevailing market rates. The alignment is accomplished primarily through adjustments to each Corporate Officer’s total direct compensation. The compensation program helps us to attract and retain the talent we need to grow and sustain our business. Our goal is to compensate executives for their level of responsibility, development and individual performance. The Committee believes that as the responsibility and authority of a Corporate Officer increases, the portion of his or her compensation determined by the Company’s performance should also increase. Each Corporate Officer’s current responsibility, development and individual performance is assessed by the Committee to determine the appropriate compensation given performance in their position. The compensation program is intended to provide executives who are judged to perform their duties at a proficient level with a total direct compensation package that approximates the market median compensation for such position based upon the data provided by Towers Perrin. Each element of total direct compensation is benchmarked to the prevailing market, however, in certain circumstances local practices related to long-term incentives and bonuses may be significantly different than those applicable to the Company as a whole. In those circumstances, the Company emphasizes consistency in the application of its long-term incentive programs and adjusts base and bonus so as to maintain total direct compensation in an amount that is consistent with the Company’s compensation philosophy.

Base Salary

The CEO evaluates each of the Corporate Officers annually and makes recommendations to the Committee for base salary. The base salary of the CEO is set by the Board of Directors. In general, but subject to individual circumstances, base salaries reflect market rates for comparative positions and the NEO’s level of proficiency and performance. The base salary of NEOs assessed by the CEO and the Committee to be proficient is generally targeted around the market median of the survey market compensation data. The base compensation of NEOs who are assessed to still be developing in their role in general would be below the market median and those judged to be performing at a significantly higher level would be above the market median. The Committee in each circumstance uses its judgment and experience in setting the specific level of base salary relative to the general market median data.

Executive Incentive Cash Bonus

The annual executive incentive cash bonus for the Corporate Officers is paid pursuant to the Executive Incentive Cash Bonus Plan. This plan is intended to link annual incentive compensation to the creation of shareholder value. The Executive Incentive Cash Bonus Plan provides for the annual payment of a cash bonus (Incentive Cash Bonus) to selected executives based upon the performance of the Company during the fiscal year. The annual Incentive Cash Bonus is reported in the Summary Compensation Table under the column titled “Non-equity Incentive Plan Compensation” as required by SEC regulation.

The measure of performance for the Incentive Cash Bonus is Economic Value Added (EVA). EVA in general terms is equal to the Company’s net operating income after subtraction of taxes and a charge for capital. The Committee believes that the utilization of the EVA measurement system, with its focus on maximizing the Company’s return on capital investments relative to its cost of capital, is an effective means of evaluating and rewarding executive performance. The cash bonus for NEOs in fiscal 2007 was based upon consolidated EVA for the entire Company.

Under the Executive Incentive Cash Bonus Plan a participant is assigned an Incentive Cash Bonus target expressed as a percentage of his or her base pay, and the actual bonus payment is determined by comparing the actual improvement in EVA achieved by the Company against expected improvement. The expected improvement is the dollar amount of EVA improvement necessary to earn the targeted EVA bonus. The interval is the dollar amount of EVA change, either above or below the expected improvement, necessary to either double the EVA bonus amount or reduce it to zero.

The actual Incentive Cash Bonus amount paid with respect to any year may range from 0 to 2 times of the target based upon the relative achievement of our EVA targets described below. The Committee sets the EVA targets for 3 year periods. The Incentive Cash Bonus earned by participants is expected over time to equal 100 percent of his or her individual target. The target Incentive Cash Bonus payment for the NEOs generally is set at 100 percent of the market median bonus amount for comparable positions as shown in the Published Survey Data , although as explained earlier base pay and bonus may be adjusted in order to maintain total compensation in an amount that is consistent with our compensation philosophy. The Committee believes that this use of Incentive Cash Bonus is consistent with the objective of making compensation for senior corporate officers more variable with the Company’s performance.

The Incentive Cash Bonus payment target percentages for NEOs in fiscal 2007 ranged from 85 percent of base salary for the CEO to 60 percent of base salary for other NEOs. For fiscal 2008, the payment target percentage for our CEO was increased to 100 percent of base salary. This increase was based upon the CEO’s greater experience in his role, his improved performance and the market information provided by the Published Survey Data. The Committee is responsible for administering all elements of the Executive Incentive Cash Bonus Plan, except that those elements of the plan relating to the CEO (including target percentage payment) are approved by the Board. The Committee approves participants in the plan, the target payment percentage, the EVA improvement goals and the cost of capital. The Audit Committee at the end of each fiscal year approves the calculation of EVA results for the year and the EVA change from the previous year and the resulting bonus factor. The Committee certifies the use of the bonus factor for use in the Incentive Cash Bonus calculation. For fiscal 2007 participants in the Executive Incentive Cash Bonus Plan received Incentive Cash Bonus payments amounting to 1.563 times their individual targets. The EVA targets for 2007 were an expected improvement of $11 million and an interval of $29 million. The EVA targets beginning in 2008 are an expected improvement of $9 million and an interval of $32 million. The cost of capital in both 2007 and 2008 is 9 percent.

Long-Term Incentives

Our shareholders in 2004 approved our Long-Term Incentive Plan (LTI Plan). The plan authorizes the Company to issue stock, restricted stock, options, restricted stock units, and other forms of equity-based compensation (Long-Term Incentive Grants). The key objectives of making Long-Term Incentive Grants under the LTI Plan are:
• To provide an appropriate level of equity reward to Corporate Officers that ties a meaningful part of their compensation to the long-term returns generated for shareholders.
• To provide an appropriate equity award to the next level of executives where market data would support their inclusion in an annual equity award plan.
• To assist the achievement of our share ownership requirements.
• To attract, retain and reward key employees.

We believe that a significant portion of executive pay should be aligned with long-term shareholder returns and that encouraging long-term strategic thinking and decision-making requires that executives have a significant stake in the long-term success of Herman Miller. The Committee is responsible for administering all elements of the LTI Plan and for making all Long-Term Incentive Grants under the LTI Plan, except that the Board approves the grants to the CEO.

The LTI Plan provides for the issuance of options with a reload feature. A reload feature permits an option holder who exercises an option to receive an additional (reload) option in connection with the exercise. The reload option has an exercise price equal to the price at which the existing option was exercised and represents a number of shares equal to the number of shares traded in to exercise the option and to pay the taxes on the exercise of the option. The reload feature exists in option grants made before fiscal year 2007. The Committee, beginning in fiscal year 2007, discontinued the practice of issuing new options with reload features.

MANAGEMENT DISCUSSION FROM LATEST 10K

Executive Overview

We use problem-solving design and innovation to enhance the performance of human habitats worldwide, making our customers’ lives more productive, rewarding, delightful, and meaningful. We do this by providing high quality products and related knowledge services. At present, most of our customers come to us for work environments. Our primary products include furniture systems, seating, storage and material handling solutions, freestanding furniture, and casegoods. Our services extend from workplace and real estate strategy to furniture asset management. We recently launched two new ventures aimed at extending the Herman Miller brand into new market opportunities. The first of these is Convia TM , a business which provides programmable electrical and data infrastructure for building interiors. We also introduced The Be Collection TM ; a suite of new products intended to further our reach into the work accessories market.

Our primary domestic manufacturing operations are located in Michigan and Georgia. We also have a significant manufacturing presence in the United Kingdom, our largest marketplace outside the United States. In fiscal year 2007, we opened a new manufacturing operation in China.

Our products are sold internationally through wholly-owned subsidiaries or branches in various countries including Canada, France, Germany, Italy, Japan, Mexico, Australia, Singapore, China, India, and the Netherlands. Our products are offered elsewhere in the world primarily through independent dealerships.

We manufacture our products using a system of lean manufacturing techniques collectively referred to as the Herman Miller Production System (HMPS). We strive 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 lead time for the majority of our products is 10 to 20 days. As a result, the rate of our inventory turns is high. These combined factors could cause our inventory levels to appear relatively low in relation to sales volume.

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

Our business comprises various operating segments as defined by generally accepted accounting principles. These operating segments are determined on the basis of how we internally report and evaluate financial information used to make operating decisions and are organized by the various markets we serve. For external reporting purposes, we aggregate these operating segments as follows.
• North American Furniture Solutions –Includes the business associated with the design, manufacture, and sale of furniture products for office and healthcare environments throughout the United States, Canada, and Mexico.
• Non-North American Furniture Solutions –Includes the business associated with the design, manufacture, and sale of furniture products primarily for work-related settings outside North America.
• Other –Includes our North American residential furniture business as well as other business activities such as Convia and startup businesses associated with the Herman Miller Creative Office and unallocated corporate expenses.

We rely on the following core strengths in delivering workplace solutions to our customers.
• Problem-Solving Design and Innovation– We are committed to developing aesthetically and functionally innovative new products and have a history of doing so. We believe our skills and experience in matching problem-solving design with the workplace needs of our customers provide us with a competitive advantage in the marketplace. An important component of our business strategy is to actively pursue a program of new product research, design, and development. We accomplish this through the use of an internal research and design staff as well as external design resources generally compensated on a royalty basis.
• Operational Excellence– We were among the first in our industry to embrace the concepts of lean manufacturing. HMPS provides the foundation for all of our manufacturing operations. We are committed to continuously improving both product quality and production and operational efficiency.
• Building and Leading Networks –We value relationships in all areas of our business. We consider our networks of innovative designers, owned and independent dealers, and suppliers to be among the most important competitive factors vital to the long-term success of our business.

Channels of Distribution
Our products and services are offered to most of our customers under standard trade credit terms between 30 and 45 days and are sold through the following distribution channels.
• Independent Contract Furniture Dealers and Licensees –Most of our 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 our products and distribute them to end customers. We recognize revenue on product sales through this channel once our products are shipped and title passes to the dealer. Many of these dealers also offer furniture-related services, including product installation.
• Owned Contract Furniture Dealers –At June 2, 2007, we owned 9 contract furniture dealerships, some of which have operations in multiple locations. The financial results of these owned dealers are included in our Consolidated Financial Statements. Product sales to these dealerships are eliminated as inter-company transactions from our consolidated financial results. We recognize revenue on these sales once products are shipped to the end customer and installation is substantially complete. We believe independent ownership of contract furniture dealers is generally, the best model for a financially strong distribution network. With this in mind, our strategy is to continue to pursue opportunities to transition our owned dealerships to independent owners. Where possible, our goal is to involve local managers in these ownership transitions.
• Direct Customer Sales –We sometimes sell products and services directly to end customers without an intermediary (e.g. sales to the U.S. federal government). In most of these instances, we contract separately with a dealership or third-party installation company to provide sales-related services. We recognize revenue on these sales once products are shipped and installation is substantially complete.
• Independent Retailers –Certain products are sold to end customers through independent retail operations. Revenue is recognized on these sales once products are shipped and title passes to the independent retailer.

Challenges Ahead
Like all businesses, we are faced with a host of challenges and risks. We believe our core strengths and values, which provide the foundation for our strategic direction, have us well prepared to respond to the inevitable challenges we will face in the future. While we are confident in our direction, we acknowledge the risks specific to our business and industry. Refer to Item 1A of our Annual Report on Form 10-K for discussion of certain of these risk factors.
Future Avenues of Growth
We believe we are well positioned to successfully pursue our mission despite the risks and challenges we face. That is, we believe we can continue to improve the performance of human habitats worldwide. In pursuing our mission, we have identified the following as key avenues for our future growth.
• Primary Markets –Capturing additional market share within our existing primary markets by offering superior solutions to customers who value space as a strategic tool
• Adjacent Markets –Further applying our core skills in environments such as healthcare, higher education, and residential
• Developing Economies –Expanding our geographic reach in areas of the world with significant growth potential
• New Markets-Developing new products and technologies that serve new markets

Industry Analysis
The Business and Institutional Furniture Manufacturer’s Association (BIFMA) is the trade association for the U.S. domestic office furniture industry. We closely monitor the trade statistics reported by BIFMA and consider them among the key indicators of industry-wide sales and order performance. We also analyze BIFMA statistical information over several quarters as a benchmark comparison against the performance of our domestic U.S. business. Finally, BIFMA regularly provides its members with industry forecast information, which we use internally as one of many considerations in our short- and long-range planning process.
Discussion of Business Conditions

Our fiscal year ended June 2, 2007 included 52 weeks of operations. By comparison, the year ended June 3, 2006 included 53 weeks of operations; the extra week was required to bring our fiscal reporting dates in line with the actual calendar months. We report an additional week of operations in our fiscal calendar approximately every six years for this reason. The fiscal year ended May 28, 2005 included a standard 52 weeks of operations.

Fiscal 2007 marked our third consecutive year of double-digit sales and net earnings growth. During the year we made continued progress toward many of our long-term strategic goals. While sales growth was seen across virtually all areas of our business in fiscal 2007, our Non-North American Furniture Solutions segment once again outpaced our business in North America. Our business outside North America has continued to become a larger proportion of our consolidated net sales, a fact we believe makes us a stronger, more deeply diversified company. This international growth has been driven by the expansion of our distribution footprint and investments in new products. In February of this year we opened a new manufacturing plant in China. This operation, combined with our fast growing network of independent dealers in the region, will serve customers within China and throughout Asia.

Our strategic progress in fiscal 2007 was not limited to international sales growth. Market acceptance of our most recent systems product introductions, My Studio Environments TM and Vivo TM Interiors, has exceeded our expectations, although we did incur higher than expected start-up costs related to these products. Our pursuit of new market opportunities led us to introduce The Be Collection, a suite of work accessories aimed at offering users more personalization and control within their work environments. We also launched Convia, a new building infrastructure technology which we believe offers significant potential for growth in an entirely new market.

Direct material cost increases remained a challenge during much of fiscal 2007. While in some cases, these costs moderated during the second half of the year, particularly in the case of steel components, for the most part they remained above the levels in fiscal 2006. In response to these higher costs, we implemented a general price increase effective in February 2007. The price adjustment varied by product line and increased our commercial product list prices an average of 5 percent. This price change followed similar increases in each of the past two fiscal years, each of which averaged approximately 4 percent of list price. We have been successful in capturing a portion of general price increases in recent years. However, we expect the intense price competition in our industry to continue. Accordingly, our past success in capturing benefit from our price changes is not necessarily indicative of our ability to do so in the future.

The general economic environment for our industry was positive throughout most of fiscal 2007, with office furniture consumption being bolstered by strong corporate profits, service sector employment, and non-residential construction rates. The outlook for the industry, however, looks somewhat mixed given current economic conditions. In its May 2007 domestic industry forecast, BIFMA noted that these key economic indicators are expected to moderate in the near-term. The forecast, which extends through calendar year 2008, indicates an expectation that industry sales and orders will continue to grow, though at a slower pace than in recent years.

MANAGEMENT DISCUSSION FOR LATEST QUARTER
Discussion of Current Business Conditions

Notwithstanding an increasingly overall negative U.S. macro-economic outlook, we saw marked improvement in order entry rates throughout the second quarter of fiscal 2008 compared to the first quarter. Average weekly orders during the first quarter of this year were $37.2 million. In September the pace of orders increased to an average of $43.5 million per week, and stayed at roughly that level throughout the entire quarter. In total, orders in the second quarter were 18.3% higher than the first quarter; an amount that exceeded the 7% to 8% we normally expect as a result of seasonal growth from sales to the U.S. federal government.

Strong order pacing, especially early in the second quarter, drove modest sales growth in the quarter on a year-over-year basis. Our gross margin in the second quarter improved significantly from the prior year due to improved price-yield, lower direct material costs, and a favorable shift in product sales mix. This solid improvement in gross margin combined with reduced operating expenses drove our consolidated operating income percentage to 12.9% — an improvement of 110 basis points from the same quarter last year. We also set an all-time record for our company in quarterly diluted earnings per share at $0.67 in the period.

During the second quarter we announced our intent to initiate a number of actions aimed at improving operating profitability and enabling greater and faster investment in our strategic growth initiatives. One of these initiatives effected during the second quarter, a workforce restructuring plan, eliminated approximately 150 full-time positions. Subsequent to the end of the second quarter, we entered into a series of capital structure transactions, including an agreement to issue $200 million in private placement notes, the proceeds of which will be used to repurchase our stock through an accelerated share repurchase agreement. We also increased our syndicated revolving line of credit to $250 million. Also, in December we announced the acquisition of Brandrud Furniture, Inc; a strategic move that we are confident will enhance our already growing position as a provider of furniture solutions within the healthcare industry.

Our operating performance in the second quarter is encouraging, particularly when viewed in the context of the near-term strategic plans we have yet to complete. As our opening comment to this report suggests, however, we are faced with a cautious macro-economic outlook for our industry and the national economy as a whole. The Business Institutional Furniture Manufacturer’s Association (BIFMA) issued its most recent domestic industry forecast in November 2007. The report outlines an expectation that office furniture sales and shipment levels in the U.S. will decline between calendar years 2007 and 2008. This represents a downward revision to its August 2007 forecast, which anticipated growth, albeit at low levels, in industry orders and shipments over that same period. An expected softening in employment growth, consumer spending, and business investment were cited as drivers of the revised forecast.

Consolidated Sales, Orders, and Backlog
Net sales in the second quarter of $505.9 million were $6.8 million higher than the same period in fiscal 2007. The general price increase we implemented in February 2007 has continued to drive year-over-year growth in sales dollars. We estimate this price increase drove between $8.5 million and $9.5 million in additional net sales compared to the prior year second quarter. The amount of the price increase that we have captured as additional net sales has been between 30% and 50% of the total list price increase. This capture rate is similar to our experience with general price increases implemented in recent years. The competitive pricing environment within our industry generally precludes us from capturing the full benefit of a list price increase.

Currency exchange rate fluctuations from the prior year second quarter had a positive impact on our consolidated net sales in the period. The general weakening of the U.S. Dollar relative to non-U.S. currencies drove an estimated $7 million increase in our second quarter net sales relative to the prior year period.

The net sales increase resulting from the price change and currency rates was partially offset in the quarter by a year-over-year reduction of non-furniture product sales (OEM sales). In the second quarter of last year, we recognized approximately $6.0 million in net sales under this OEM contract, which expired at the end of fiscal 2007. Accordingly, there were no related sales recorded in the first half of this fiscal year.

For the six-month period ended December 1, 2007, net sales were $997.6 million. This represents an increase of 5.1% or $48.8 million from the prior year period. We estimate between $16 million and $17 million of this amount was driven by the February 2007 price increase. Currency exchange rate fluctuations drove an estimated $12 million increase in our consolidated net sales relative to the prior year six-month period. Partially offsetting these factors were sales in the prior year-to-date period of $9.1 million under the previously referenced OEM contract.

On a sequential-quarter basis, net sales in the period increased $14.2 million or 2.9% from the first quarter of fiscal year 2008. This percentage is considerably lower than the 11.0% increase we reported last fiscal year between the first and second quarters. This relative decline in sequential-quarter sales growth was driven by lower order-entry rates in the first quarter of this year.

Orders in the second quarter of fiscal 2008 increased 8.2% and 18.3% on a year-over-year and sequential-quarter basis, respectively. Consolidated orders of $572.5 million in the second quarter were the highest level we have reported in seven years. This represents a sharp contrast to our experience in the first quarter of this fiscal year, when we reported the first year-over-year decline in consolidated orders in 15 consecutive quarters. The increase in order rates between the first and second quarters of this year was driven primarily by an improvement in North American order entry levels.

Through the first six months of fiscal 2008, orders of $1,056.3 million were up $24.0 million, or 2.3% versus the prior year.

The backlog of unfilled orders as of December 1, 2007 was $346.5 million. This amount is up $22.6 million or 7.0% from our December 2, 2006 backlog of $323.9 million. The increase in the backlog compared to the prior year was driven by a significant improvement in order activity in our North American business segment in the second quarter. On a sequential-quarter basis, the ending backlog increased $66.7 million or 23.8% from the first quarter of this fiscal year.

Performance versus the Domestic Contract Furniture Industry
Net sales at our U.S. operations, excluding the impact of OEM sales in fiscal 2007, decreased 1.1% during the second quarter of fiscal 2008 compared to the same quarter last year. Conversely, over the same period our domestic orders increased 5.1%. By comparison, BIFMA reported an estimated year-over-year increase in U.S. office furniture shipments of 5.6% for the three-months ended November 2007. Industry orders for the quarter as reported by BIFMA grew 4.7% from the same period last year.

We remain cautious about reaching conclusions regarding changes in market share based on analysis of data on a short term basis. Instead, we believe such conclusions should only be reached by analyzing comparative data over several quarters.

While the sales and order data for our U.S. operations provide a relative comparison to BIFMA, it is not intended to be an exact comparison. The actual data we report to BIFMA is done so in a manner consistent with the BIFMA definition of office furniture "consumption." This definition differs slightly from the categorization we have presented in this report. Notwithstanding this difference, we believe our presentation provides the reader with a more relevant comparison.

Consolidated Gross Margin
Consolidated gross margin in the second quarter was 35.6%, representing a 150 basis-point improvement over the same quarter last year. The improvement resulted primarily from favorable price discounting and the benefit realized from the February 2007 price increase. We also benefited from an overall shift in the sales mix this quarter toward a higher percentage of seating relative to last year and we achieved margin improvement in one of our newest system furniture lines. Additionally, direct material expenses in the second quarter decreased from the prior year primarily due to lower steel and aluminum component costs. These positive factors were partially offset by increased overhead expenses associated with service sales, the implementation of annual salary and wage increases at the beginning of the fiscal year, and continued inefficiencies associated with the production of one of our newest lines of systems furniture. Despite the increased payroll costs and specific production inefficiencies, total direct labor expenses in the second quarter improved, as a percent of net sales, by 60 basis-points from the prior year. Part of this improvement in the labor percentage is attributable to the mix shift toward seating in the quarter.

Manufacturing overhead expenses in the second quarter were higher than the same period last year, both in terms of dollars and as a percent of net sales. Costs related to increased sales of services and purchased-complete products, particularly in our Non-North American business segment, were among the more significant drivers of this increase. These sales generally have lower margins than sales of Herman Miller products. Overhead expenses also increased in the quarter relative to the prior year due to higher costs for depreciation and employee benefits, including medical and prescription drug coverage, and salaries for indirect production labor.

On a percent-of-sales basis, direct material expenses decreased 170 basis points from the second quarter of fiscal 2007. A significant amount of this reduction is attributable to the impact of the February 2007 price increase and the relative increase in service sales, both of which increased net sales without a corresponding increase in direct material expenses. We also benefited in the quarter from a favorable shift in the market price of steel and aluminum components relative to the prior-year period. We estimate the change in commodity pricing reduced our second quarter direct material costs in the range of $1.5 million to $2.5 million compared to the same period last year. Despite this improvement, we believe it is likely that going forward, we will see continued volatility in market pricing for key commodities. Our product pricing strategy, combined with our commitment to lean manufacturing principles under the Herman Miller Production System (HMPS), continue to be our primary means of addressing the financial impact of this volatility.

On a sequential-quarter basis, the gross margin percentage in the second quarter increased 150 basis points from the first quarter of this fiscal year. During the first quarter we incurred expenses related to services on a large project within our North American Furniture Solutions business segment. Due to the level of uncertainty associated with our ability to be reimbursed for these services, we recognized the expenses, which totaled approximately $5.0 million, without recording any associated service revenue. These expenses reduced our first quarter gross margin by approximately 100 basis points. Higher net sales and improved production leverage in the second quarter also contributed to the sequential improvement in gross margin. Partially offsetting these factors were incentive compensation expenses, which were $1.9 million higher than the first quarter.

Gross margin in the first six months of fiscal 2008 was 34.9 % versus 34.0% in the prior year. The improvement was driven mainly by leverage gained on increased net sales and savings from lower market prices for key manufacturing components. On a year-to-date basis, we estimate the savings on these commodity-based components to be between $3.0 million and $4.5 million as compared to same period last year.

Restructuring
During the second quarter we announced a business restructuring plan designed to reduce operating expenses and improve profitability. The restructuring actions included the elimination of approximately 150 full-time positions, the majority of which were located within our West Michigan operations. The positions that were eliminated represented a variety of functional areas, and the individuals affected were offered one-time termination benefits, including severance and outplacement services. In connection with these actions, we recognized pre-tax restructuring expenses in the quarter totaling $5.2 million. This restructuring charge reduced diluted earnings per share by $0.05 in the quarter. Cash payments for the related termination benefits totaled $0.5 million in the second quarter. The remaining $4.7 million in termination benefits are recorded within “Other accrued liabilities” in the Condensed Consolidated Balance Sheet at December 1, 2007. For further discussion regarding the restructuring plan, refer to Note 16.

Operating Expenses and Operating Earnings
Operating expenses in the second quarter were $109.7 million or 21.7% of net sales. This compares to operating expenses of $111.7 million or 22.4% of net sales in the same quarter last year. Contributing to this $2.0 million decrease was a reduction in research and development (R&D) spending and a set of focused initiatives in the quarter aimed at controlling business expenses. R&D expenses in the second quarter were $1.3 million lower than the prior year period. This reduction was not driven by a deliberate change in our approach to new product development. Rather, it related purely to the timing of specific R&D projects between periods. In addition, we realized expense reductions across a range of categories, including salaries and benefits, travel and entertainment, and charitable donations.

Increased operating expense spending in other areas partially offset these factors in the second quarter relative to the prior year. We incurred approximately $0.8 million in higher compensation-related expenses, including those for annual merit increases and stock-based compensation. Variable selling expenses for categories such as commissions and designer royalties were higher in the current year second quarter. We also recognized $0.8 million in higher expense associated with adjustments to our calculated accounts receivable reserves. Finally, we recognized a $1.2 million expense at one of our international subsidiaries related to the adjustment of a value added tax liability.

On a sequential-quarter comparison, operating expenses in the second quarter decreased from the first quarter of this year both as a percentage of net sales and in total dollars. Our first quarter operating expenses were $113.8 million or 23.1% of net sales. A large portion of the $4.1 million expense decrease relates to reduced spending for travel and entertainment and lower accruals for charitable donations. Much of the higher travel and entertainment spending in the first quarter related to Neocon, our annual industry tradeshow held in June. Incentive bonus expenses in the current year second quarter were $1.1 million higher than the first quarter.

During the second quarter, we received a payment totaling $0.6 million associated with the previous sale of a furniture dealership. The contractual terms of this sale were completed in the first quarter of fiscal year 2006, and included an “earn-out” provision requiring the buyer to provide additional purchase consideration based upon the future profitability of the dealership. The payment we received this quarter relates to this provision, and was recorded as a pre-tax gain within consolidated operating earnings.

Through the first six months of fiscal 2008, operating expenses totaled $223.6 million or 22.4% of sales. This compares to $218.3 million or 23.0% of sales in the same period last year. This represents an expense increase in the current year-to-date period of $5.3 million. Approximately $3.5 million of this increase came from higher compensation-related expenses, including those for accrued incentive bonuses, annual merit increases, and stock-based compensation. Additionally, variable selling expenses in the current year period contributed significantly to the year-over-year increase.

Our investment in R&D, excluding royalties, totaled $9.4 million and $10.7 million for the quarterly periods ended December 1, 2007 and December 2, 2006, respectively. Through the first six months of fiscal 2008, R&D expenses were $19.1 million. This compares to $20.4 million in the same period last fiscal year.

Operating earnings in the second quarter were $65.2 million compared to $58.7 million last year, representing an increase of 11.1%. As a percentage of net sales, operating earnings were 12.9%; up from 11.8% in the prior year. On a year-to-date basis, operating earnings in the current year of $118.9 million were up 13.9% from $104.4 million last year. As a percentage of net sales, operating earnings through six months were 11.9% versus 11.0% last year.

Other Income/Expense and Income Taxes
Net other expenses for the three and six-months ended December 1, 2007 totaled $3.1 million and $6.5 million, respectively. This compares to $2.8 million and $5.7 million, respectively, in the same periods last year. The increase in expense over both comparative periods was driven primarily by higher interest costs related to borrowings against our revolving credit facility.

We incurred a net foreign currency transaction gain of $0.5 million in the current quarter compared to a loss of $0.1 million last year. On a year-to-date basis, we recorded a net currency transaction gain of $0.2 million as compared to a loss of less than $0.1 million in the first six months of last year.

The effective tax rates for the three months ended December 1, 2007 and December 2, 2006, were 34.0% and 34.6%, respectively. The effective tax rates were 33.8% and 34.1% for the six months ended December 1, 2007, and December 2, 2006, respectively. The current quarter and year-to-date effective rates were below the United States federal statutory rate of 35% primarily due to the manufacturing deduction under the American Jobs Creation Act of 2004 (AJCA).

The effective rate in the prior year second quarter was below the statutory rate primarily due to foreign tax credits and the manufacturing deduction under the AJCA, and accrual adjustments related to our foreign captive insurance company. In addition, the prior year-to-date effective tax rate benefited from the release of federal tax reserves relating to the closure of an Internal Revenue Service review for fiscal years 1997 through 2003. We expect our full-year effective tax rate for fiscal 2008 to be between 32% and 34%.

At the beginning of fiscal year 2008, we adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109" (FIN 48). Upon adoption, we recognized an increase in accrued liabilities associated with unrecognized tax benefits. We also recognized an increase in accruals for estimated interest and penalties associated with those unrecognized tax benefits. These accrual adjustments were recorded as a $1.0 million reduction, net of tax, to the June 3, 2007 balance of retained earnings. This adjustment, which did not impact net earnings, is considered a Cumulative Effect of a Change in Accounting Principle as required by FIN 48. In addition, in the first quarter of this year we reclassified $8.7 million from current accrued income taxes payable into non-current liabilities. This reclassification was made to match the anticipated timing of future income tax payments.

Reportable Operating Segments
Our business comprises various operating segments as defined by generally accepted accounting principles in the United States. These operating segments are determined on the basis of how we internally report and evaluate financial information used to make operating decisions. For external reporting purposes, we aggregate these operating segments as follows:
o North American Furniture Solutions – Includes the business associated with the design, manufacture and sale of furniture products for office, healthcare and educational environments, throughout the United States, Canada and Mexico.
o Non-North American Furniture Solution – Includes the business associated with the design, manufacture and sale of furniture products, primarily for work-related settings, outside North America.
o Other –Includes our North American residential furniture business as well as other business activities, including Convia, and activities associated with the Herman Miller Creative Office. Convia is our subsidiary aimed at providing programmable electrical and data infrastructure for building interiors. The “other” category also includes unallocated corporate expenses such as those associated with corporate restructuring actions.

Net sales in the second quarter within our North American Furniture Solutions segment were $407.6 million. This performance was flat with the prior year, reflecting the impact of soft order pacing in the first quarter of this year. Our U.S. domestic operations reported a decrease in sales relative to the prior year of approximately 1%. Included in this overall decline was a reduction in sales within the healthcare industry; a market which in recent quarters has shown substantial year-over-year percentage growth. In contrast to our domestic U.S. results, sales in Canada and Mexico were strong this quarter, each posting increases over the prior year second quarter. While the decline in sales within the core U.S. contract furniture business was primarily the result of the order pacing in the first quarter, which improved in the second quarter, driving growth in the ending backlog. Through six months of operations, our North American Furniture Solutions segment reported net sales of $813.9 million. This is an increase of 4.3% from the prior year total of $780.0 million.

Operating earnings in the second quarter within the North American Furniture Solutions segment were $53.7 million, or 13.2% of net sales. This compares to $49.7 million or 12.2% in the same period last year. On a year-to-date basis, operating earnings in the current year were $95.7 million or 11.8% of net sales, compared to $88.1 million or 11.3% last year. As previously discussed in the context of gross margin performance, in the first quarter of this year we recognized service-related expenses of approximately $5.0 million, without an associated benefit from service revenue. These expenses reduced the year-to-date operating income percentage within our North American business segment by approximately 60 basis points.

Net sales within our Non-North American Furniture Solutions segment totaled $83.7 million in the second quarter, marking a 17.6% increase over prior year second quarter sales of $71.2 million. Our U.K. operation, which represents the segment’s largest contributor to net sales, reported particularly strong sales growth in the period. Though our Asian operations remain relatively small in dollar terms when compared to the consolidated total, sales this quarter again showed double-digit growth over the prior year period. Our manufacturing facility in China has been in operation since February 2007 and we are pleased with how the startup has progressed. The growth of our presence in Asia remains a key focus of our long-term business strategy. For the six-month period ended December 1, 2007, net sales for the Non-North American segment were $157.0 million, representing an increase of 17.3% over the prior year total of $133.8 million.

Operating earnings in the second quarter for the Non-North American segment were $13.5 million, or 16.1% of net sales. This compares to $7.2 million or 10.1% in the same period last year. On a year-to-date basis, operating earnings were $23.4 million or 14.9% of net sales. In the same period last year we reported operating earnings of $13.3 million or 9.9%.

Net sales within the “Other” category were $14.6 million in the second quarter of this year, compared to $20.3 million last year. For the six-month period, net sales were $26.7 million compared to $35.0 million last year. The prior year second quarter and six-month results included OEM sales of $6.0 million and $9.1 million, respectively. That OEM contract has since expired and we are no longer manufacturing and selling the related components. The elimination of these sales is the primary driver of the year-over-year decrease in net sales within the category.

We reported an operating loss of $2.0 million for the second quarter within the “Other” segment category. This compares to operating income of $1.8 million last year. The loss in the current quarter was driven primarily by the restructuring expenses recorded in connection with employment reductions. On a year-to-date basis, we reported an operating loss of $0.2 million in the current period compared to income of $3.0 million in fiscal 2007.


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