SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
|[ X ]||ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
|[__]||TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
|For Fiscal Year Ended May 31, 2008||Commission File No. 001-15141|
Herman Miller, Inc.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction
of incorporation or organization)
| 855 East Main Avenue
PO Box 302
(Address of principal
Registrants telephone number, including area code: (616) 654 3000
Securities registered pursuant to Section 12(b) of the Act: None
|Securities registered pursuant to Section 12(g) of the Act:||Common Stock, $.20 Par Value
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ X ] No [__]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [__] No [ X ]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [__]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
|Large accelerated filer [ X ]||Accelerated filer [__]||Non-accelerated filer [__]|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [__] No [ X ]
The aggregate market value of the voting stock held by nonaffiliates of the registrant (for this purpose only, the affiliates of the registrant have been assumed to be the executive officers and directors of the registrant and their associates) as of December 1, 2007, was $1,644,906,639 (based on $27.45 per share which was the closing sale price as reported by NASDAQ).
The number of shares outstanding of the registrants common stock, as of July 23, 2008: Common stock, $.20 par value 55,722,747 shares outstanding.
DOCUMENTS INCORPORATED BY
Certain portions of the Registrants Proxy Statement for the Annual Meeting of Shareholders to be held on September 30, 2008, are incorporated into Part III of this report.
TABLE OF CONTENTS
|Item 1 Business||4|
|Item 1A Risk Factors||7|
|Item 1B Unresolved Staff Comments||10|
|Item 2 Properties||10|
|Item 3 Legal Proceedings||11|
|Item 4 Submission of Matter to a Vote of Security Holders||11|
|Additional Item: Executive Officers of the Registrant||12|
|Item 5 Market for the Registrant's Common Equity, Related Shareholder Matters, and Issuer|
|Purchases of Equity Securities||13|
|Item 6 Selected Financial Data||15|
|Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations||17|
|Item 7A Quantitative and Qualitative Disclosures about Market Risk||38|
|Item 8 Financial Statements and Supplementary Data||40|
|Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosures||82|
|Item 9A Controls and Procedures||82|
|Item 9B Other Information||82|
|Item 10 Directors, Executive Officers, and Corporate Governance||83|
|Item 11 Executive Compensation||83|
|Item 12 Security Ownership of Certain Beneficial Owners and Management and Related|
|Item 13 Certain Relationships and Related Transactions, and Director Independence||84|
|Item 14 Principal Accountant Fees and Services||84|
|Item 15 Exhibits and Financial Statement Schedule||85|
|Report of Independent Registered Public Accounting Firm on Financial Statement Schedule||87|
|Schedule II Valuation and Qualifying Accounts||88|
Item 1 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 organizations and individuals all over the world. The companys 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 companys 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.
Information relating to segments is provided in Note 20 to the Consolidated Financial Statements included in Item 8 of this report.
The companys 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®, Resolve®, My Studio EnvironmentsTM and Vivo InteriorsTM). 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). Going beyond these product offerings, the companys ConviaTM business offers a programmable, modular electrical building infrastructure solution which enables building owners and individuals to adapt their habitat in new and profound ways. In fiscal 2008, the company introduced and began order entry for TeneoTM storage furniture, a system of free standing storage, hosting, and display pieces designed for both individual and group work settings. Additionally, the company acquired Brandrud Inc., a manufacturer of seating, tables, casework, and accessories primarily for healthcare, as well as education and corporate environments.
The companys 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 70 percent of the companys sales in the fiscal year ended May 31, 2008, 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 companys 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 our customers' operations. This includes proprietary sales tools, interior design and product specification software; order entry and manufacturing scheduling and production systems; and direct connectivity to the companys suppliers.
The companys 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.
The companys 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 companys 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 companys profitability. Further information regarding the impact of direct material costs on the companys financial results is provided in Managements Discussion and Analysis in Item 7 of this report.
The company has 157 active United States utility patents on various components used in its products and 52 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 stylized Herman Miller and the Herman Miller Circled Symbolic M trademark are registered in the United States and many foreign countries. The company does not believe that any material part of its business depends on the continued availability of any one or all of its patents or trademarks, or that its business would be materially adversely affected by the loss of any thereof, except for Herman Miller®, Herman Miller Circled Symbolic M®, Geiger®, Action Office®, Ethospace®, Aeron®, Mirra®, Eames®, PostureFit®, and Vivo InteriorsTM. It is estimated that the average remaining life of such patents and trademarks is approximately 5 years and 10 years, respectively.
Working Capital Practices
Information concerning the companys 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 companys business.
It is estimated that no single dealer accounted for more than 4 percent of the companys net sales in the fiscal year ended May 31, 2008. It is also estimated that the largest single end-user customer accounted for approximately 7 percent of the companys net sales with the 10 largest customers accounting for approximately 16 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 May 31, 2008, the companys backlog of unfilled orders was $286.2 million. At June 2, 2007, the companys backlog totaled $288.0 million. It is expected that substantially all the orders forming the backlog at May 31, 2008, 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.
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 companys 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.
All aspects of the companys 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, it competes with many smaller companies in several markets and with several manufacturers that have greater resources and sales. In the United States, the companys most significant competitors are Haworth, HNI Corporation, Kimball International, Knoll, and Steelcase.
Research, Design and
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 $38.8 million, $42.1 million, and $36.7 million, on research and development activities in fiscal 2008, 2007, and 2006, respectively. Generally, royalties are paid to designers of the companys products as the products are sold and are not included in research and development costs since they are variable based on product sales.
Living with integrity and respecting the environment stands as one of the company's core values. This is based in part, on the belief that environmental sustainability and commercial success are not exclusive ends, but instead exist side by side in a mutually beneficial relationship. The company continues to rigorously reduce, recycle, and reuse solid waste generated by its manufacturing processes and the companys efforts and accomplishments have been widely recognized. Additionally, the company is pursuing the use of green energy in its manufacturing processes. 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.
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 companys 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 companys history, and its relations with its employees are considered good. Approximately 6 percent of the companys 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 May 31, 2008, the company employed 6,292 full-time and 186 part-time employees, representing a 1.3 percent decrease and a 7.5 percent decrease, respectively, compared with June 2, 2007. In addition to its employee work force, the company uses temporary purchased labor to meet uneven demand in its manufacturing operations.
The companys sales in international markets are made primarily 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 companys products are offered through licensing of foreign manufacturers on a royalty basis.
The companys 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 companys 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 companys foreign exchange risk.
The companys annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are made available free of charge through the Investors section of the companys internet website at www.hermanmiller.com, as soon as practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (SEC). The companys filings with the SEC are also available for the public to read and copy in person at the SECs Public Reference Room at 100 F Street NE, Washington, DC 20549, by phone at 1-800-SEC-0330, or via their internet website at www.sec.gov.
Item 1A RISK FACTORS
The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones we face; others, either unforeseen or currently deemed less significant, may also have a negative impact on our company. If any of the following actually occurs, our business, operating results, cash flows, and financial condition could be materially adversely affected.
We may not be successful
in implementing and managing our growth strategy.
We have established a set of key strategic goals for our business. Included among these are specific targets for growth in net sales and operating profit as a percentage of net sales. Our strategic plan assumes growth targets will be achieved by pursuing and winning new business in the following areas:
|||Primary Markets Capturing additional market share within our primary markets by offering superior solutions to customers who value space as a strategic tool.|
|||Adjacent Markets Further applying our core skills in space 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 wholly new markets.|
While we have confidence that our strategic plan targets opportunities that are appropriate and achievable and that anticipates and manages the associated risks, there is the possibility that the strategy may not deliver the projected results due to inadequate execution, incorrect assumptions, sub-optimal resource allocation, or changing customer requirements.
There is no assurance that our current product and service offering will allow us to meet these goals. Accordingly, we believe we will be required to continually invest in the research, design, and development of new products and services. There is no assurance that such investments will have commercially successful results.
Certain growth opportunities may require us to invest in acquisitions, alliances, and the startup of new business ventures. These investments may not perform according to plan.
Future efforts to expand our business within developing economies, particularly within China and India, may expose us to the effects of political and economic instability. Such instability may cause us difficulty in competing for business. It may also put at risk the availability and/or value of our capital investments within these regions. These expansion efforts expose us to operating environments with complex, changing, and in some cases, inconsistently applied legal and regulatory requirements. Developing knowledge and understanding of these requirements poses a significant challenge, and failure to remain compliant with them could limit our ability to continue doing business in these locations.
Pursuing our growth plan in new and adjacent markets, as well as within developing economies, will require us to find effective new channels of distribution. There is no assurance that we can develop or otherwise identify these channels of distribution.
The markets in which we operate are highly competitive, and we may not be successful in winning new business. We are one of several companies competing for new business within the furniture industry. Many of our competitors offer similar categories of products, including office seating, systems and freestanding office furniture, casegoods, storage, and residential and healthcare furniture solutions. We believe that our innovative product design, functionality, quality, depth of knowledge, and strong network of distribution partners differentiates us in the marketplace. However, increased market pricing pressure could make it difficult for us to win new business with certain customers and within certain market segments at acceptable profit margins.
Additionally, in recent years we have seen an increased market presence from international competitors. We expect this to continue, particularly in the area of low-priced imports into the United States. There is a risk that this competitive pricing pressure could make it difficult for us to raise prices in response to increasing raw-material prices and other inflationary pressures.
Adverse economic and industry conditions could have a negative impact on our business, results of operations, and financial condition. Customer demand within the contract office furniture industry is affected by various macro-economic factors; general corporate profitability, white-collar employment levels, new office construction rates, and existing office vacancy rates are among the most influential factors. History has shown that declines in these measures can have an adverse effect on overall office furniture demand. Additionally, factors and changes specific to our industry, such as developments in technology, governmental standards and regulations, and health and safety issues can influence demand. There is no assurance that current or future economic or industry conditions will not adversely affect our business, operating results, or financial condition.
Our business presence outside the United States exposes us to certain risks that could negatively affect our results of operations and financial condition. We have significant manufacturing and sales operations in the United Kingdom, which represents our largest marketplace outside the United States. We also have manufacturing operations in China. Additionally, our products are sold internationally through wholly-owned subsidiaries or branches in various countries including Canada, Mexico, Brazil, France, Germany, Italy, Netherlands, Japan, Australia, Singapore, China, and India. In certain other regions of the world, our products are offered primarily through independent dealerships.
Doing business internationally exposes us to certain risks, many of which are beyond our control and could potentially impact our ability to design, develop, manufacture, or sell products in certain countries. These factors could include, but would not necessarily be limited to:
|||Political, social, and economic conditions|
|||Legal and regulatory requirements|
|||Labor and employment practices|
|||Cultural practices and norms|
|||Security and health concerns|
|||Protection of intellectual property|
In some countries, the currencies in which we import and export products can differ. Fluctuations in the rate of exchange between these currencies could negatively impact our business. Additionally, tariff and import regulations, international tax policies and rates, and changes in U.S. and international monetary policies may have an adverse impact on results of operations and financial condition.
Disruptions in the supply of
raw and component materials could adversely affect our manufacturing and assembly
We rely on outside suppliers to provide on-time shipments of the various raw materials and component parts used in our manufacturing and assembly processes. The timeliness of these deliveries is critical to our ability to meet customer demand. Any disruptions in this flow of delivery could have a negative impact on our business, results of operations, and financial condition.
Increases in the market
prices of manufacturing materials may negatively affect our profitability.
The costs of certain manufacturing materials used in our operations are sensitive to shifts in commodity market prices. In particular, the costs of steel, plastic and aluminum components and particleboard are sensitive to the market prices of commodities such as raw steel, aluminum, crude oil, lumber, and resins. Increases in the market prices of these commodities may have an adverse impact on our profitability if we are unable to offset them with strategic sourcing, continuous improvement initiatives or an inability to increase prices to our customers.
Disruptions within our
dealer network could adversely affect our business.
Our ability to manage existing relationships within our network of independent dealers is crucial to our ongoing success. Although the loss of any single dealer would not have a material adverse effect on the overall business, our business within a given market could be negatively affected by disruptions in our dealer network caused by the termination of commercial working relationships, ownership transitions, or dealer financial difficulties.
If dealers go out of business or restructure, we may suffer losses because they may not be able to pay for products already delivered to them. Also, dealers may experience financial difficulties, creating the need for outside financial support, which may not be easily obtained. In the past, we have, on occasion, agreed to provide direct financial assistance through term loans, lines of credit, and/or loan guarantees to certain dealers. There is no assurance that these dealers will be able to repay amounts owed to us or to banks with which we have offered guarantees.
for highly skilled and talented workers could adversely affect our business.
The successful implementation of our business strategy will depend, in part, on our ability to attract and retain a skilled workforce. The increasing competition for highly skilled and talented employees could result in higher compensation costs, difficulties in maintaining a capable workforce, and leadership succession planning challenges.
Costs related to product
defects could adversely affect our profitability.
We incur various expenses related to product defects, including product warranty costs, product recall and retrofit costs, and product liability costs. These expenses relative to product sales vary and could increase. We maintain reserves for product defect-related costs based on estimates and our knowledge of circumstances that indicate the need for such reserves. We cannot, however, be certain that these reserves will be adequate to cover actual product defect-related claims in the future. Any significant increase in the rate of our product defect expenses could have a material adverse effect on operations.
Government and other
regulations could adversely affect our business.
Government and other regulations apply to many of our products. Failure to comply with these regulations or failure to obtain approval of products from certifying agencies could adversely affect the sales of these products and have a material negative impact on operating results.
Item 1B UNRESOLVED STAFF COMMENTS N/A
Item 2 PROPERTIES
The company owns or leases facilities located throughout the United States and several foreign countries. The location, square footage, and use of the most significant facilities at May 31, 2008 were as follows.
|Holland, Michigan||917,400||Manufacturing, Distribution, Warehouse, Design, Office|
|Spring Lake, Michigan||818,300||Manufacturing, Warehouse, Office|
|Zeeland, Michigan||750,800||Manufacturing, Warehouse, Office|
|England, U.K||76,200||Manufacturing, Office|
|Atlanta, Georgia||176,700||Manufacturing, Warehouse, Office|
|England, U.K||93,500||Manufacturing, Warehouse|
|Ningbo, China||94,700||Manufacturing, Warehouse, Office|
The company also maintains showrooms or sales offices near most major metropolitan areas throughout North America, Europe, Asia/Pacific, and Latin America. The company considers its existing facilities to be in excellent condition, efficiently utilized, well suited, and adequate for its design, production, distribution, and selling requirements.
Item 3 LEGAL PROCEEDINGS
The company is involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such proceedings and litigation currently pending will not materially affect the companys Consolidated Financial Statements.
In fiscal 2008, we reached an agreement with the New York, Michigan, and Illinois Attorneys General on all matters related to an inquiry of the Minimum Advertised Price Policy maintained by our Herman Miller for the Home division. In reaching the settlement, all parties acknowledged that the agreement does not constitute either an admission or denial of liability or wrongdoing. The agreement, which was reached through a consent decree filed with the United States District Court in New York, required the company to pay a total of $0.75 million. This amount was previously recorded within Other Liabilities on our Consolidated Balance Sheets.
Item 4 SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of the year ended May 31, 2008.
ADDITIONAL ITEM: EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information relating to Executive Officers of the company is as follows.
|Name||Age||Year Elected an|
|James E. Christenson||61||1989||Senior Vice President, Legal Services, and Secretary|
|Donald D. Goeman||51||2005||Executive Vice President, Research, Design & Development|
|Kenneth L. Goodson, Jr||56||2003||Executive Vice President, Operations|
|Andrew J. Lock||54||2003||Executive Vice President, Chief Administrative Officer|
|Kristen L. Manos||49||2003||Executive Vice President, North American Office Learning Environments|
|Gary S. Miller||58||1984||Executive Vice President, Creative Office|
|Elizabeth A. Nickels||46||2000||Executive Vice President and|
|President, Herman Miller for Healthcare|
|Joseph M. Nowicki||46||2003||Treasurer and Vice President, Investor Relations|
|John P. Portlock||62||2003||Executive Vice President and President, International|
|Curtis S. Pullen||48||2007||Executive Vice President, Chief Financial Officer|
|Michael A. Volkema||52||1995||Chairman|
|Charles J. Vranian||58||2003||Executive Vice President, North American Emerging Markets|
|Brian C. Walker||46||1996||President and Chief Executive Officer|
Except as discussed in this paragraph, each of the named officers has served the company in an executive capacity for more than ten years. Mr. Goeman joined Herman Millers New Product Development arena in 1980, and during his 29 years with the company he has held a variety of new product design and development leadership positions. 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 was Executive Vice President and Chief Financial Officer from 2000 to 2007. Prior to joining the company in 2000, she 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. Pullen joined Herman Miller in 1991. He was Senior Vice President of Dealer Distribution from 2003 to 2007, Senior Vice President of Finance for North America from 2000 to 2003, and Vice President of Finance, Herman Miller International from 1994 to 2000. 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.
There are no family relationships between or among the above-named executive officers. There are no arrangements or understandings between any of the above-named officers pursuant to which any of them was named an officer.
Item 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Herman Miller, Inc., common stock is traded on the NASDAQ-Global Select Market System (Symbol: MLHR). As of July 24, 2008, there were approximately 27,600 record holders, including individual participants in security position listings, of the companys common stock.
|Per Share and Unaudited
|Year ended May 31, 2008|
|Year ended June 2, 2007|
(1)The sum of the quarters may not equal the annual balance due to rounding associated with the calculation of earnings per share on an individual quarter basis
Dividends were declared and paid quarterly during fiscal 2008 and 2007 as approved by the Board of Directors. While it is anticipated that the company will continue to pay quarterly cash dividends, the amount and timing of such dividends is subject to the discretion of the Board depending on the companys future results of operations, financial condition, capital requirements, and other relevant factors.
The following is a summary of share repurchase activity during the fourth quarter ended May 31, 2008.
per Share or
|(c) Total Number of|
Shares (or Units)
Purchased as Part
Announced Plans or
|(d) Maximum Number (or|
Value) of Shares (or
Units) that May Yet be
Purchased Under the
Plans or Programs (2)
(1)No shares were purchased outside of a publicly announced plan or program.
(2) Amounts are as of the end of the period indicated
(3) On January 3, 2008, the company entered into two agreements to purchase shares of its common stock from Morgan Stanley & Co. Inc., for an aggregate purchase price of $200 million, plus fees, under an Accelerated Share Repurchase (ASR) program. The company entered into these agreements as part of a repurchase program approved by its Board of Directors. The number of shares to be repurchased under the ASR program will be based on the volume-weighted-average price of the companys common stock during the term of the agreements. The actual number of shares to be repurchased will be determined at the completion of the ASR program. On January 4, 2008 the company paid $200.6 million in exchange for an initial delivery of 4.4 million shares, representing approximately 70 percent of the shares that could have been purchased, based on the closing price of its common stock on January 3, 2008. An additional 0.6 million shares were delivered upon the completion of the initial hedge period which was February 4, 2008. An additional 0.4 million shares were delivered at the completion of one of the agreements on April 7, 2008. Final settlement under the ASR will occur in fiscal 2009.
The company repurchases shares under
a previously announced plan authorized by the Board of Directors as follows.
Plan announced on September 28, 2007, providing share repurchase authorization of $300,000,000
with no specified expiration date.
No repurchase plans expired or were terminated during the fourth quarter of fiscal 2008, nor do any plans exist under which the company does not intend to make further purchases.
During the period covered by this report the company did not sell any of its equity shares that were not issued under the Securities Act of 1933.
Set forth below is a line graph comparing the yearly percentage change in the cumulative total shareholder return on the Companys common stock with that of the cumulative total return of the Standard & Poors 500 Stock Index and the NASD Non-Financial Index for the five-year period ended May 31, 2008. The graph assumes an investment of $100 on June 1, 2003 in the companys common stock, the Standard & Poors 500 Stock Index and the NASD Non-Financial Index, with dividends reinvested.
|Herman Miller, Inc.||$||100||$||125||$||156||$||160||$||195||$||134|
|S&P 500 Index||$||100||$||116||$||124||$||134||$||159||$||145|
Information required by this item is also contained in Item 12 of this report.
Item 6 SELECTED FINANCIAL DATA
|Review of Operations
(In millions, except key ratios and per share data)
|Net sales (3)||$||2,012.1||$||1,918.9||$||1,737.2||$||1,515.6||$||1,338.3|
|Gross margin (3)||698.7||645.9||574.8||489.8||415.6|
|Selling, general, and administrative (3)(10)||400.9||395.8||371.7||327.7||304.1|
|Design and research (11)||51.2||52.0||45.4||40.2||40.0|
|Earnings before income taxes||230.4||187.0||147.6||112.8||51.6|
|Cash flow from operating activities||213.6||137.7||150.4||109.3||82.7|
|Depreciation and amortization||43.2||41.2||41.6||46.9||59.3|
|Common stock repurchased plus|
|cash dividends paid||287.9||185.6||175.4||152.0||72.6|
|Sales growth (decline) (3)||4.9||%||10.5||%||14.6||%||13.2||%||0.1||%|
|Gross margin (1)(3)||34.7||33.7||33.1||32.3||31.1|
|Selling, general, and administrative (1)(3)(10)||19.9||20.6||21.4||21.6||22.7|
|Design and research expense (1)(3)(11)||2.5||2.7||2.6||2.7||3.0|
|Operating earnings (1)(3)||12.3||10.3||9.1||8.0||4.6|
|Net earnings growth (decline)||18.0||30.1||45.9||60.8||81.5|
|After-tax return on net sales (3)(5)||7.6||6.7||5.7||4.5||3.2|
|After-tax return on average assets (6)||21.0||19.4||14.4||9.6||5.7|
|After-tax return on average equity (7)||170.5||87.9||64.2||37.3||21.9|
|Share and Per Share Data (2)|
|Earnings per share-diluted||$||2.56||$||1.98||$||1.45||$||0.96||$||0.58|
|Cash dividends declared per share||0.35||0.33||0.31||0.29||0.18|
|Book value per share at year end||0.42||2.47||2.10||2.45||2.71|
|Market price per share at year end||24.80||36.53||30.34||29.80||24.08|
|Weighted average shares outstanding|
|Total assets (9)||$||783.2||$||666.2||$||668.0||$||707.8||$||714.7|
|Working capital (4)||182.7||103.2||93.8||162.3||207.8|
|Interest-bearing debt and related|
|Total capital (8)||398.9||331.5||317.2||364.5||401.8|
(1)Shown as a percent of net sales.
(2)Retroactively adjusted to reflect a two-for-one stock split occurring in 1998.
(3) Amounts for 1998-2000 were restated in 2001 to reflect reclassification of certain expenses.
(4) Calculated using current assets less non-interest bearing current liabilities.
(5) Calculated as net earnings divided by net sales.
(6) Calculated as net earnings divided by average assets.
(7) Calculated as net earnings divided by average equity.
(8) Calculated as interest-bearing debt plus shareholders equity.
(9) Amount for 2005 was restated in 2006 to reflect reclassifications between current assets and current liabilities.
(10) Amounts for 2005 and 2006 were restated to reflect 2007 classification.
(11) Amount for 2006 was restated to reflect 2007 classification.
Item 7 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the issues discussed in Managements Discussion and Analysis in conjunction with the companys Consolidated Financial Statements and the Notes to the Consolidated Financial Statements included in this Form 10-K.
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 in both corporate office and healthcare settings. We also have a growing presence in educational and residential markets, including home office. Our primary products include furniture systems, seating, storage and material handling solutions, freestanding furniture, and casegoods. Our services extend from workplace to furniture asset management. In Fiscal 2008, we introduced Teneo TM storage furniture, a system of free-standing storage, hosting, and display pieces designed for individual and group work settings. We extended our reach into the work accessories market in fiscal 2008 with The Be CollectionTM, a suite of new products designed to enhance personal comfort, organization, and technology support. ConviaTM, our new product and new business launched in fiscal 2007, leads us into the field of modular electrical building systems. This building infrastructure offering enables building owners and individuals to adapt and control their habitat in new and profound ways.
We are globally positioned in terms of manufacturing operations. In the United States, our manufacturing operations are located in Michigan, Georgia, and Washington. In Europe, we have a significant manufacturing presence in the United Kingdom, our largest marketplace outside of the United States. In Asia, we have manufacturing operations in Ningbo, 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 have customers in over 100 countries around the globe.
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 consists of 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 SolutionsIncludes 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 SolutionsIncludes the business associated with the design, manufacture, and sale of furniture products primarily for work-related settings outside North America.
OtherIncludes our North American residential furniture business as well as other business activities such as Convia, and unallocated corporate expenses.
We rely on the following core strengths in delivering workplace solutions to our customers.
Problem-Solving Design and InnovationWe are committed to developing research-based functionality and aesthetically 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 third party design resources generally compensated on a royalty basis.
Operational ExcellenceWe 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. We have begun to extend this lean process work externally to our manufacturing supply chain and to our distribution channel. We believe this work holds great promise for further gains in reliability, quality and efficiency.
Building and Leading NetworksWe value relationships in all areas of our business. We consider our networks of innovative designers, owned and independent dealers, and suppliers to be among our most important competitive factors and 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 LicenseesMost 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 DealersAt May 31, 2008, 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. Subsequent to the end of our fiscal year, we transitioned one owned dealership in Texas to independent ownership status. The effect of this transaction on the companys consolidated financial statements is not material.
Direct Customer SalesWe 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 RetailersCertain 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.
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 MarketsCapturing additional market share within our existing primary markets by offering superior solutions to customers who value space as a strategic tool
Adjacent MarketsFurther applying our core skills in environments such as healthcare, higher education, and residential
Developing EconomiesExpanding our geographic reach in areas of the world with significant growth potential
New MarketsDeveloping new products and technologies that serve new markets
The Business and Institutional Furniture Manufacturers Association (BIFMA) is the trade association for the U.S. domestic office furniture industry. We monitor the trade statistics reported by BIFMA and consider them an indicator of industry-wide sales and order performance. BIFMA publishes statistical data for the contract segment and the office supply segment within the U.S. furniture market. The U.S. contract segment is primarily with large to mid-size corporations installed via a network of dealers. The office supply segment is primarily to smaller customers via wholesalers and retailers. We primarily participate, and believe we are a leader in the contract segment. It is important to note that our diversification strategy lessens our dependence on the U.S. office furniture market.
We also analyze BIFMA statistical information as a benchmark comparison against the performance of our domestic U.S. business and also to that of our competitors. The timing of large project-based business may affect comparisons to this data. 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.
Our fiscal years ended May 31, 2008 and June 2, 2007 each 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.
Although fiscal 2008 was a year marked with several challenges and uncertainties, we once again realized many achievements. We translated modest top-line growth into solid improvement in operating income and record earnings per share. Our relentless pursuit of innovative solutions coupled with our strategy to diversify into new and emerging markets both at home and abroad, enabled us to grow despite generally slowing economic activity in certain key markets. Also, our cost control efforts and the timing of cost increases for certain inputs proved to limit our exposure to increasing costs for raw materials and fuel. Our expanded international distribution channel and increased manufacturing presence in China contributed to another double-digit increase in sales for our non-North American Furniture Solutions segment. Net sales outside of North America continued to increase as a percentage of our consolidated net sales in fiscal 2008.
In addition to growing the business overseas, our North American Furniture Solutions segment posted modest growth for the year. The acquisition of Brandrud Furniture, Inc. (Brandrud) during fiscal 2008 contributed to our double-digit sales growth to the healthcare industry. With this acquisition, we expanded our reach into patient rooms, patient treatment areas, and public spaces.
We introduced several new products designed to reach customers in nearly all areas of our business. These new products made a strong showing at Neocon, the contract furniture industrys largest tradeshow. Our newly introduced filing and storage solution, TeneoTM, won Best of Show at NeoCon and we were named Manufacturer of the Year by the Office Furniture Dealers Association.
In fiscal 2008, we significantly changed our capital structure to better leverage our balance sheet. We issued $200 million of senior unsecured private placement notes and commenced a $200 million accelerated share repurchase program (ASR). Prior to the ASR, we repurchased approximately 2.1 million shares. As a result of the ASR, we retired an additional 5.4 million shares, bringing the full-year repurchase count to 7.5 million shares. The ASR will be completed in September 2008 and we expect to retire approximately 2 million additional shares at that time. We also increased our borrowing capacity with a new $250 million syndicated revolving line of credit.
During the year, we announced several initiatives to improve our operating profitability and enable greater and faster investment in our strategic growth initiatives. We put in place a restructuring action that eliminated approximately 150 full-time positions and we implemented cost reduction activities that boosted operating earnings toward our long-term goal of 13 percent of sales. We are pleased with our performance for the year, and we continue to actively manage our business in a volatile macro-economic environment.
Looking forward, the general economic outlook for our industry in the U.S. is expected to be negative through calendar year 2009, and we remain appropriately cautious as a result. BIFMA issued its most recent report in May 2008 and expects that the growth rate of office furniture orders and shipments in the U.S. for the balance of calendar 2008 to be negative 6.5 percent and negative 9.7 percent, respectively. For calendar 2009, BIFMA expects negative 6.3 percent for both orders and shipments compared to calendar 2008. This downturn is primarily the result of tighter credit, pale growth in GDP, concerns over inflation and business confidence which may create a drag on office furniture consumption. BIFMA expects that corporate profits will rebound in early 2009 and modestly boost office furniture consumption.
The following is a comparison of our annual results of operations and year-over-year percentage changes for the periods indicated.
|(Dollars in Millions)|
|Fiscal 2008||% Chg|
|Fiscal 2007||% Chg|
|Cost of sales||1,313.4||3.2||%||1,273.0||9.5||%||1,162.4|
|Net Other expenses||16.2||45.9||%||11.1||9.9||%||10.1|
|Earnings before income|
|Income tax expense||78.2||35.1||%||57.9||21.4||%||47.7|
|Minority interest, net of tax||(0.1||)||NA||||NA||0.7|
The following table presents, for the periods indicated, the components of the companys Consolidated Statements of Operations as a percentage of net sales.
|Fiscal Year Ended|
|May 31, 2008||June 2, 2007||June 3, 2006|
|Cost of sales||65.3||66.3||66.9|
|Selling, general, and administrative|
|Design and research expenses||2.5||2.7||2.6|
|Total operating expenses||22.5||23.3||24.0|
|Net other expenses||0.8||0.6||0.6|
|Earnings before income taxes||11.5||9.7||8.5|
|Income tax expense||3.9||3.0||2.7|
Net Sales, Orders, and
Fiscal 2008 Compared to Fiscal 2007
For the fiscal year ended May 31, 2008, consolidated net sales rose 4.9 percent to $2,012.1 million from $1,918.9 million in fiscal 2007. This year-over-year growth was driven by strong top-line performance across several of our operating units, most notably in the markets that we serve outside of North America.
The weakening of the U.S. Dollar during fiscal 2008 added approximately $27 million to our top-line growth and we realized an increase of $7.1 million in net sales due to our recent acquisition of Brandrud. In fiscal 2007, we recognized $20.4 million of net sales to a third party equipment manufacturer (OEM Sales). The OEM Sales contract expired at the end of fiscal 2007 and accordingly, there were no related sales recorded in fiscal 2008.
Consolidated net trade orders for fiscal 2008 totaled $2,008.5 million. This is comparable to net trade orders of $1,967.0 million last year, and represents an increase of 2.1 percent. There was some volatility in our order pacing in fiscal 2008 primarily due to uncertainties in the U.S. economy. We also experience normal seasonality from quarter to quarter due to the timing of orders from the federal government and the December holiday season. Our backlog of unfilled orders at the end of fiscal 2008 totaled $286.2 million, a 0.6 percent decline from $288.0 million at the end of fiscal 2007.
BIFMA reported an estimated year-over-year increase in U.S. office furniture shipments of approximately 3.5 percent for the twelve-month period ended May 2008. By comparison, net sales growth for our domestic U.S. business totaled approximately 2.8 percent. We believe that while comparisons to BIFMA are important, we continue to pursue a strategy of revenue diversification that makes us less reliant on the drivers that impact BIFMA.
Fiscal 2007 Compared to Fiscal 2006
Consolidated net sales of $1,918.9 million in fiscal year 2007 increased $181.7 million from fiscal 2006. This increase of 10.5 percent was driven by growth within both of our reportable business segments. The additional week in fiscal 2006 added approximately $31 million in net sales to that period. Excluding the impact of this additional week, the year-over-year growth in net sales between fiscal years 2006 and 2007 totaled approximately 12.5 percent. Despite intense price competition in all of our major market areas, we captured approximately $24 million to $26 million of net sales in fiscal 2007 as a result of pricing actions.
Consolidated net trade orders in fiscal 2007 totaled $1,967.0 million representing a year-over-year growth of 11.4 percent from orders of $1,765.7 million in fiscal 2006. Excluding the extra week of operations in the fiscal 2006, order growth was 13.7 percent between periods.
Average weekly order pacing was higher in the first half of fiscal 2007 than in the second half of the year. This trend reflected moderating demand in the North American contract furniture market, combined with the seasonality we typically experience in our order patterns. The backlog of unfilled orders at the end of fiscal 2007 totaled $288.0 million, increasing 20.9 percent from the fiscal 2006 level of $238.2 million.
During the first quarter of fiscal 2006, we completed the sale of two wholly-owned contract furniture dealerships and ceased the consolidation of an independently-owned dealership we had previously consolidated as a Variable Interest Entity (VIE) under Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46(R)). Due to this dealerships improved financial condition, the owners were successful in obtaining outside bank financing. As a result, we were no longer required to include this VIE in our Consolidated Financial Statements. These dealership transitions affected our year-over-year comparisons. Net sales and trade orders from these dealers included in our fiscal 2006 financial results totaled approximately $10.7 million and $14.4 million, respectively. The financial results of these dealerships were not included in our Consolidated Financial Statements during fiscal 2007.
In the second quarter of fiscal 2008, we announced a restructuring program designed to reduce operating expenses and improve profitability. These actions included the elimination of approximately 150 full-time positions within the North American Furniture Solutions segment. 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. Pre-tax restructuring expenses for fiscal 2008 of $5.1 million, are reflected separately in the Consolidated Statements of Operations. The related cash payments were $4.5 million in fiscal 2008. The balance of the restructuring accrual at May 31, 2008 is $0.6 million, and is reflected on the Consolidated Balance Sheet within Other accrued liabilities.
Discussion of Business Segments Fiscal 2008 Compared to Fiscal 2007
Net sales within our North American Furniture Solutions segment increased from $1,563.6 million in fiscal 2007 to $1,636.3 million in the current year. This represents a year-over-year increase of $72.7 million or 4.7 percent. We experienced growth throughout our North American business operations, but particularly strong growth was experienced in the healthcare industry which posted double-digit year-over-year growth. The healthcare industry remains a key growth area within the segment and lines up with our strategy to pursue diversification. Sales at our Mexican subsidiary again reached double-digit growth over the prior year. Canadian sales turned around from a flat year in 2007 to impressive double-digit growth in fiscal 2008. Operating earnings for the segment in fiscal 2008 were $195.9 million, or 12.0 percent of net sales. This compares to segment earnings of $161.7 million or 10.3 percent in the prior year. With top-line growth of 4.7 percent within the segment, we saw both dollar and percent-of-sales increases to operating earnings in the North American Furniture Solutions segment. This segments strong operating performance is largely due to improved margins on certain recently introduced products, our focus on cost management, and our execution of the restructuring plan discussed above.
Net sales from our non-North American Furniture Solutions segment continues to grow at double-digit rates. Every region within the segment posted increases in year-over-year net sales. Total net sales for the segment were $323.5 million, up $45.0 million or 16.2 percent. Sales generated from our non-North American Furniture Solutions segment increased to 16.1 percent of our consolidated net sales, an increase of 160 basis points from 14.5 percent in the prior year. The largest sales contribution within this segment continues to come from our operations in the United Kingdom, which posted a 17.5 percent year-over-year increase to the top line. We also saw a strong increase in net sales within continental Europe. Our results within the Asia Pacific region are particularly noteworthy, growing by 26.8 percent from the prior year. We continue to pursue our diversification strategy and the effects are clearly visible in these results. Operating earnings within our non-North American segment totaled $47.3 million for the year or 14.6 percent of net sales. This compares to $28.9 million or 10.4 percent of net sales in fiscal 2007, an increase of 420 basis points.
Net sales within the Other segment category were $52.3 million in fiscal 2008 compared to $76.8 million in the prior year. As previously discussed within the context of consolidated net sales, the decrease is primarily the result of OEM Sales of $20.4 million recognized in fiscal 2007 that did not occur in fiscal 2008. Net sales within our North American Home business were down 8.3 percent primarily due to the challenges associated with the U.S. macroeconomic environment.
The U.S. Dollar continued to weaken against major currencies throughout fiscal 2008. The changes in currency exchange rates from the prior year affected the U.S. dollar value of net sales within both primary operating segments. We estimate these changes effectively increased our fiscal 2008 net sales within the North American Furniture Solutions segment by approximately $12 million, driven largely by the U.S. dollar / Canadian dollar average exchange rate during the current year. Currency exchange rate fluctuations within our non-North American Furniture Solutions segment, increased net sales in fiscal 2008 by approximately $15 million. This was primarily driven by favorable movements in the U.S. Dollar / British Pound Sterling and U.S. Dollar / Euro exchange rates as compared to last year. It is important to note that period-to-period changes in currency exchange rates have a directionally similar impact on our international cost structures. Operating earnings within our non-North American segment increased an estimated $6 million in fiscal 2008 due to the aforementioned changes in currency exchange rates relative to the prior year level. The estimated impact on operating earnings of our North American business segment was an increase of approximately $1 million.
Discussion of Business Segments Fiscal 2007 Compared to Fiscal 2006
During fiscal 2007, net sales within our North American Furniture Solutions segment increased to $1,563.6 million from $1,448.0 million in fiscal 2006. This represents an increase of $115.6 million or 8.0 percent. On a weekly-average basis (which adjusts for the extra week of operations in fiscal 2006) net sales in this segment were 10.1 percent higher than fiscal 2006. Particularly noteworthy is our business within the healthcare industry, which realized significant year-over-year percentage increases. Sales at our Mexican subsidiary reached double-digit growth over fiscal 2006. Canadian sales, which increased over the prior year level during the first half of fiscal 2007, ended the full year approximately flat with 2006. Operating earnings in fiscal 2007 were $161.7 million, or 10.3 percent of net sales. This compares to $139.9 million or 9.7 percent in fiscal 2006. The increase in both dollars and percentage relative to fiscal 2006 was largely driven by an 8.0 percent sales increase and the resulting improved operating leverage. In addition, fiscal 2006 included approximately $5.0 million in higher compensation-related expenses associated with the extra week of operations in that year. Incentive bonus expenses recognized in fiscal 2006 were approximately $4.0 million higher than those recorded in fiscal 2007 as determined under our plan. These factors were partially offset by higher design and research costs in fiscal 2007, which were approximately $5.8 million higher than those recorded in the North American Furniture Solutions segment during fiscal 2006.
Our non-North American Furniture Solutions segment had year-over-year increases in net sales across all geographic regions except South America. Total net sales in fiscal 2007 of $278.5 million were up 28.4 percent from $216.9 million in fiscal year 2006. On a weekly-average basis, net sales in fiscal 2007 were 30.9 percent higher than the prior year. The non-North American Furniture Solutions segment generated 14.5 percent of our consolidated net sales in fiscal 2007, compared to 12.5 percent in fiscal 2006. Sales in the United Kingdom were 23.7 percent higher than fiscal 2006. Our results in the Asia Pacific region were particularly strong in fiscal 2007, with net sales increasing 61.6 percent from the prior year. In fiscal 2007, we expanded our independent dealer network in China and Japan. Operating earnings in fiscal 2007 within our non-North American segment totaled $28.9 million, or 10.4 percent of net sales. This compares to $14.1 million or 6.5 percent in fiscal 2006.
Net sales within the Other segment category were $76.8 million in fiscal 2007 compared to $72.3 million in fiscal 2006. The increase was driven by the growth of our North American Home business. Sales in fiscal 2006 included net sales of $6.8 million from a VIE we had previously consolidated under the accounting provisions of FIN 46(R).
Changes in currency exchange rates from fiscal 2006 affected the U.S. dollar value of net sales within both primary operating segments. We estimate these changes effectively increased our fiscal 2007 net sales within the North American Furniture Solutions segment by approximately $2 million. This was largely driven by the general weakening in the average exchange rate between the U.S. Dollar and Canadian Dollar during fiscal 2007. In our non-North American Furniture Solutions segment, exchange rate changes increased fiscal 2007 net sales by an estimated $11 million. This increase was driven by favorable movements in the U.S. dollar / British Pound Sterling and U.S. dollar / Euro exchange rates as compared to fiscal 2006. Operating earnings within our non-North American segment increased an estimated $2 million in fiscal 2007 due to changes in currency exchange rates relative to fiscal 2006 levels. The estimated impact on operating earnings of our North American business segment was not significant in fiscal 2007.
Fiscal 2008 Compared to Fiscal 2007
Our fiscal 2008 gross margin as a percentage of sales was 34.7 percent, an improvement of 100 basis points from the prior year level. Favorable direct material costs contributed to this increased gross margin performance year-over-year. Lower relative direct labor costs also boosted our margins while overhead expenses were slightly unfavorable. Details relative to each component of gross margin follow.
Direct material costs as a percentage of sales in the current year decreased 100 basis points. Although a higher sales volume favorably affected the percentage, the effect of our fixed contracts for the procurement of certain of our raw materials also contributed to the improvement. The majority of our fixed-price contracts expired during the fourth quarter of this year and we began to see the impact of increased costs for our raw material inputs late in the year.
Our direct labor costs were lower by 40 basis points as a percentage of sales from prior year levels. This reduction is primarily due to higher sales volume, and our continued manufacturing process improvements. Overhead costs increased in fiscal 2008 from prior year levels. We recognized certain costs associated with the completion of a large project, and had an overall shift into low margin service-related sales, which had the effect of increasing overhead costs by 30 basis points in fiscal 2008.
Freight expenses, as a percentage of sales, were modestly higher compared to 2007 levels. Contributing to the additional freight expenses was a significant increase in diesel prices in the United States. We have continued to benefit from the efforts of our logistics teams to consolidate shipments, increase trailer utilization, and engage lower cost carriers, which together, served to mitigate the impact of increases in fuel costs. Pricing also served to partially offset the increases in fuel costs.
Fiscal 2007 Compared to Fiscal 2006
Our fiscal 2007 gross margin improved 60 basis points from the fiscal 2006 level. The leveraging of overhead expenses against higher net sales in fiscal 2007 significantly contributed to this improvement. Direct material costs pressured gross margin performance. These cost increases were offset by the benefit captured through general price increases. This market pricing, combined with continued manufacturing process improvements, drove a reduction in direct labor expenses on a percent-of-sales basis. The improvement in direct labor was achieved despite the implementation of wage increases in the first quarter of fiscal 2007 and inefficiencies associated with new product introductions.
As a percent-of-sales, direct material expenses increased 140 basis points from the fiscal 2006 level. The direct material content associated with the launch of a new systems furniture solution drove a significant amount of this increase. While these excess costs are typical in the initial years following product launch, the impact was exacerbated by customer demand that far outpaced our business plan for fiscal 2007. Our efforts to keep pace with this demand drove additional cost into the supply chain.
Direct material costs were higher in fiscal 2007 due to increased costs for key commodities, particularly steel, plastics, aluminum, and wood particleboard over fiscal 2006 levels. In total, we estimate commodity cost increases added between $14 million and $16 million to our consolidated direct material expenses in fiscal 2007 compared to fiscal 2006. We were able to offset some of this negative impact through efficiencies gained in connection with our engineering and supply management efforts under HMPS.
Despite an increase in manufacturing overhead expenses, we improved significantly on a percent-of-sales basis in fiscal 2007 versus fiscal 2006. The expense increase was driven in part by the increase in net sales. We also incurred higher expenses in fiscal 2007 for employee benefits such as retirement programs, medical and prescription drug coverage, and annual wage increases for indirect labor employees. Partially offsetting these year-over-year expense increases were lower incentive bonus expenses in fiscal 2007. Our incentive bonus program is based on a measure of improvement in economic profit from year-to-year as opposed to an absolute level of earnings in any one period. Based on our relative performance between periods, incentive bonus expenses recorded within Cost of Sales in fiscal 2007 were $2 million lower than fiscal 2006.
Freight expenses in fiscal 2007, as a percentage of sales, were 50 basis points lower than fiscal 2006. This was due to the efforts of our distribution team to consolidate shipments, increase trailer utilization, and engage the services of lower cost carriers. Additionally, our freight percentage was reduced due to the additional net sales captured as a result of general price increases.
Fiscal 2008 Compared to Fiscal 2007
Operating expenses in fiscal 2008 were $452.1 million, or 22.5 percent of net sales. This compares to $447.8 million, or 23.3 percent of net sales in the prior fiscal year. Although there was a year-over-year increase of $4.3 million, we experienced an 80 basis point reduction to operating expenses as a percentage of sales compared to fiscal 2007. A charge of $5.1 million for restructuring expenses as discussed above is included in fiscal 2008. There were no restructuring expenses in fiscal 2007.
The year-over-year dollar increase in expenses is primarily due to increases in employee compensation and benefit costs, designer royalties, global selling expenses, program marketing costs, and the foreign exchange impact on operating expenses, partially offset by lower levels of charitable contributions, and savings from certain R&D and product management programs. Leverage on higher sales levels in the current year drove the percent-of-sales reduction in operating expenses.
Incremental employee compensation and benefit costs in fiscal 2008, which includes merit increases, stock-based compensation, and health benefits were an estimated $6 million higher than fiscal 2007. Global selling costs and designer royalty expenses, both of which vary with net sales levels, were $3.7 million and $2.4 million higher, respectively, in fiscal 2008 than in the prior fiscal year. In fiscal 2008, we continued our pursuit of bringing new and innovative products to market, which drove incremental program marketing expenses of $2.8 million compared to the prior year.
Year-over-year changes in currency exchange rates had an inflationary impact on operating expenses associated with our international operations, as measured in U.S. dollars. We estimate these changes increased our consolidated operating expenses in fiscal 2008 by approximately $4.8 million relative to the prior year.
Partially offsetting these operating expense increases were charitable contributions that were $6.3 million lower than fiscal 2007 and a combined savings from certain R&D and product management programs of $6.6 million.
Design and research costs included in total operating expenses were $51.2 million and $52.0 million in fiscal 2008 and fiscal 2007, respectively. These expenses include royalty payments to the designers of our products. We consider such royalty payments, which totaled $12.4 million and $9.9 million in fiscal years 2008 and 2007, respectively, to be variable costs of the products being sold. Accordingly, we do not include them in research and development costs as discussed in Note 1.
Fiscal 2007 Compared to Fiscal 2006
Operating expenses in fiscal 2007 were $447.8 million, or 23.3 percent of net sales, compared to $417.1 million, or 24.0 percent of net sales in fiscal 2006. This represents a year-over-year increase of $30.7 million or 7.4 percent. Our fiscal 2006 operating expenses included approximately $3.5 million in additional compensation costs associated with the extra week of operations in that year. We also incurred expenses totaling approximately $2.4 million in the first quarter of fiscal 2006 relating to the three dealerships that were transitioned to independent status in that period. Excluding these amounts, the comparable year-over-year increase in operating expenses was $37.1 million or 9.0 percent.
A significant proportion of this increase from fiscal 2006 to fiscal 2007 is attributed to expenses such as designer royalties and selling-related costs, which vary with net sales. Our portfolio of new product launches at the start of fiscal 2007 drove an increase in program marketing expenses relative to fiscal 2006. We estimate that approximately $18 million of the year-over-year increase in operating expenses resulted from higher spending on incremental employee compensation (including stock-based compensation programs), retirement, and health benefits. Increased expenses related to charitable contributions account for $2.9 million of the year-over-year increase. We also incurred higher operating expenses during fiscal 2007 related to our new market expansion efforts. Specifically, the opening of our manufacturing operation in China and the launch of two new business ventures, Convia and The Be CollectionTM, contributed to the increase.
Year-over-year changes in currency exchange rates had an inflationary impact on the operating expenses associated with our international operations, as measured in U.S. dollars. We estimate these changes increased our consolidated operating expenses in fiscal 2007 by approximately $3.1 million relative to fiscal 2006.
Fiscal 2006 operating expenses included a pre-tax charge totaling $1.4 million related to a long-term lease arrangement in the United Kingdom. Additional information on this lease arrangement can be found in Note 19.
Pretax compensation expenses associated with our stock-based compensation programs, the majority of which is classified within operating expenses, totaled $4.9 million in fiscal 2007. This compares to $2.6 million in fiscal 2006. The increase over fiscal 2006 is the result of our adoption of SFAS No. 123, Share-Based Payment (SFAS 123(R)) in the first quarter of fiscal 2007. Additional information on this accounting standard, including our method of transition and prior accounting practice, can be found in Note 14.
Design and research costs included in total operating expenses were $52.0 million in fiscal 2007. This represents an increase of $6.6 million from fiscal 2006 levels. Royalty payments included in design and research costs totaled $9.9 million and $8.7 million in fiscal years 2007 and 2006, respectively.
Fiscal 2008 operating earnings were $246.6 million. This represents an increase of 24.5% from our fiscal 2007 level of $198.1 million. As a percentage of net sales, operating earnings in fiscal 2008 increased to 12.3 percent of net sales, a 200 basis-point increase over the 10.3 percent reported in the prior year. In fiscal year 2006, we reported operating earnings of $157.7 million or 9.1 percent of net sales.
Other Expenses and Income
Net other expenses totaled $16.2 million in fiscal 2008 compared to $11.1 million in the prior year and $10.1 million in fiscal 2006. The increase in expense in fiscal 2008 compared to fiscal 2007 was principally driven by additional interest expense of $5.1 million in the current year associated with the additional senior subordinated notes related to our ASR program. Net foreign currency transaction gains recorded in fiscal 2008 totaled $0.1 million.
The year-over-year increase in net other expenses between fiscal 2007 and fiscal 2006 was primarily due to lower interest income due to a reduction in our average cash and cash equivalents balance between periods. Additionally, net foreign currency transaction gains were negligible in 2007 while we recorded a gain of $0.3 million in fiscal 2006.
Our effective tax rate was 33.9 percent in fiscal 2008 versus 31.0 percent in fiscal 2007. The current year effective rate was below the statutory rate of 35 percent primarily due to the domestic US manufacturing tax incentive. The effective rate in fiscal 2007 was lower than the statutory rate primarily due to $4.3 million in tax credits for foreign taxes, other credits for research and development activities, and tax incentives for export sales and domestic manufacturing. The fiscal 2006 effective tax rate was 32.3 percent which was lower than the statutory rate due mainly to tax benefits from research and development activities, tax incentives for export sales and domestic manufacturing, and adjustments to recognize certain foreign deferred tax assets.
We expect our effective tax rate for fiscal 2009 to be between 33.5 and 35.5 percent. For further information regarding income taxes, refer to Note 15.
In fiscal 2008 we generated $152.3 million of net earnings. This compares to net earnings in fiscal 2007 and fiscal 2006 of $129.1 million and $99.2 million, respectively. Fiscal 2008 diluted earnings per share at $2.56 was an all-time record for the company. Earnings per diluted share in fiscal 2007 were $1.98 and $1.45 in fiscal 2006.
Earnings per share in fiscal 2008 benefited from our ASR program as well as our stock repurchases earlier in the year. We reduced the average share count for fiscal 2008 by approximately 5.5 million shares from the prior year level.
Liquidity and Capital
The table below presents certain key cash flow and capital highlights for the fiscal years indicated.
|Cash and cash equivalents, end of period||$||155.4||$||76.4||$||106.8|
|Short term investments, end of period||$||15.7||$||15.9||$||15.2|
|Cash generated from operating activities||$||213.6||$||137.7||$||150.4|
|Cash used for investing activities||$||(51.0||)||$||(37.4||)||$||(47.6||)|
|Cash used for financing activities||$||(86.5||)||$||(131.5||)||$||(151.4||)|
|Pension and post-retirement benefit plan contributions||$||(5.2||)||$||(7.6||)||$||(26.3||)|
|Stock repurchased and retired||$||(266.7||)||$||(164.9||)||$||(155.1||)|
|Interest-bearing debt, end of period (1)(3)||$||375.5||$||176.2||$||178.8|
|Available unsecured credit facility, end of period (2)(3)||$||236.9||$||136.9||$||136.8|
(1)Amounts shown include the fair
market value of the company's interest rate swap arrangements. The net fair value of
these arrangements was $0.5 million at May 31, 2008, $(1.8) million at June 2, 2007, and
$(2.2) million at June 3, 2006.
(2)Amounts shown are net of outstanding letters of credit, which are applied against the company's unsecured credit facility, and excludes the $100 million accordion feature disclosed in Note 9.
(3)During the third quarter of fiscal 2008, the company issued new senior unsecured private placement notes and replaced its unsecured revolving credit facility. Refer to Note 9 and Note 10 for additional information.
Cash Flow Operating Activities
Cash generated from operating activities in fiscal 2008 totaled $213.6 million compared to $137.7 million generated in the prior year. This represents an increase of $75.9 million compared to fiscal 2007. Changes in working capital balances resulted in an $11.8 million source of cash in the current fiscal year compared to a $37.0 million use of cash in the prior year.
The source of cash related to working capital balances in fiscal 2008 is primarily driven from increased current liabilities of $33.1 million over the prior year, and to a lesser extent, lower inventory of $2.6 million from prior year levels. The increase in current liabilities is comprised of $16.6 million in tax-related accruals, $6.1 million of increased trade accounts payable and $10.4 million of other accruals. These sources of cash are offset partially by increases in volume-related accounts receivable of $21.3 million due to increased sales inside and outside North America. Sales outside North America tend to have longer cash collection cycles than those in the U.S. Increased sales through our owned dealership network resulted in higher accounts receivable balances due to the timing of these sales within the fourth quarter of fiscal 2008. A large percentage of the North American accounts receivable increase pertains to our Mexican subsidiary which has the longest cash collection cycle in North America
The working capital investment in fiscal 2007 was related to increases in inventory and accounts receivable, primarily due to the significant level of growth in our non-North American Furniture Solutions segment. A contributing factor to the working capital investment during fiscal 2007 relates to our business with the U.S. federal government. Order activity with the federal government increased significantly during fiscal 2007, particularly during the first and second quarters. These sales generally require a longer cash collection cycle than do sales to independent contract furniture dealers. Accordingly, we experienced a related increase in accounts receivable. Inventory levels were also affected by this growth in federal government business, since we are generally required to hold product in inventory longer than with non-government business. This extended inventory holding period is necessary to be consistent with our revenue recognition policy for direct customer sales.
The source of working capital cash flow in fiscal 2006 resulted principally from an increase in accounts payable and accrued liabilities, namely employee compensation and warranty accruals. This was partially offset by volume-related increases in accounts receivable and inventory levels.
Collections of accounts receivable remained strong throughout the year, and we believe our recorded accounts receivable valuation allowances at the end of fiscal 2008 are adequate to cover the risk of potential bad debts. Allowances for non-collectible accounts receivable, as a percent of gross accounts receivable, totaled 2.6 percent, 2.5 percent, and 2.8 percent at the end of fiscal years 2008, 2007, and 2006, respectively.
Included in operating cash flows are cash contributions made to our employee pension and post-retirement benefit plans which totaled $5.2 million, $7.6 million, and $26.3 million in fiscal years 2008, 2007, and 2006, respectively. For further information regarding the company's pension and post-retirement benefit plans, including information relative to the funded status of these plans, refer to Note 12.
Cash Flow Investing Activities
Capital expenditures totaled $40.5 million in fiscal 2008 and $41.3 million in fiscal 2007. Cash outflows related to investing activities in fiscal 2006 included capital expenditures of $50.8 million. Outstanding commitments for future capital purchases at the end of fiscal 2008 were approximately $7.4 million. We expect capital spending in fiscal 2009 to be between $50 million and $60 million.
Included in our fiscal 2008 investing activities, is a net cash outflow of $11.7 million related to the acquisition of Brandrud. The purchase of Brandrud augments our product offerings to the healthcare industry. In fiscal 2007, our investing activities reflected a cash outflow of $3.5 million related to the acquisition of a technology company. This acquisition added enhanced functionality to the existing product portfolio for our Convia subsidiary. Refer to Note 2 for further information related to these acquisitions.
Our net short-term investment transactions for fiscal 2008 yielded a $0.3 million source of cash. This compares to a $0.5 million use of cash in fiscal 2007.
In fiscal 2007, we completed the sale of a facility located in Canton, Georgia. The proceeds of $7.5 million are reflected in the Consolidated Statement of Cash Flows as "Proceeds from sales of property and equipment." There were no corresponding sales of facilities in fiscal 2008.
Cash Flow Financing Activities
|(In millions, except share and per shara data)||2008||2007||2006|
|Cost of shares acquired(1)||$||266.7||$||164.9||$||155.1|
|Average cost per share acquired(1)||NA||$||32.23||$||30.27|
|Average price per share issued||$||23.73||$||25.19||$||23.50|
|Cash dividends paid||$||21.2||$||20.7||$||20.3|
(1) On January 3, 2008, the company entered into two agreements to purchase shares of its common stock from Morgan Stanley & Co. Inc., for an aggregate purchase price of $200 million, plus fees, under an Accelerated Share Repurchase (ASR) program. The company entered into these agreements as part of a repurchase program approved by its Board of Directors. The number of shares to be repurchased under the ASR program will be based on the volume-weighted-average price of the companys common stock during the term of the agreements. The actual number of shares to be repurchased will be determined at the completion of the ASR program. On January 4, 2008 the company paid $200.6 million in exchange for an initial delivery of 4.4 million shares, representing 70% of the shares that could have been purchased, based on the closing price of the its common stock on January 3, 2008. An additional 0.6 million shares were delivered upon the completion of the initial hedge period which was February 4, 2008. An additional 0.4 million shares were delivered at the completion of one of the agreements on April 7, 2008. Final settlement under the ASR will occur in fiscal 2009.
In fiscal 2008 we completed a debt financing transaction involving the issuance of $200 million in senior unsecured private placement notes. Notes totaling $50 million are due in January 2015, and bear interest at a fixed annual coupon rate of 5.94 percent. The remaining $150 million of these notes are due in January 2018 and bear interest at a fixed annual coupon rate of 6.42 percent. We used the $200 million proceeds from the notes for an ASR of our common stock. Refer to Note 10 for more information related to our long-term debt.
In fiscal 2008, we also completed a refinancing of our existing unsecured credit facility, increasing our borrowing capacity from $150 million to $250 million. The new credit facility includes a $100 million increase option, subject to customary conditions. The facility may be used to refinance existing debt, provide working capital or for other general corporate purposes. In fiscal 2008, we also paid off $2.1 million of debt on behalf of Brandrud, our most recent acquisition.
Share repurchases (inclusive of our ASR in fiscal 2008) were the most significant factor affecting cash outflows from financing activities during the past three fiscal years. Our Board of Directors approved a new share repurchase authorization of $300 million in the second quarter of fiscal 2008. The amount remaining under our share repurchase authorization at the end of fiscal 2008 totaled $171.4 million.
Our Board of Directors also increased the rate of our quarterly cash dividend in two of the last three fiscal years. The first of these increases was in the third quarter of fiscal 2006 and allowed for an approximate 10 percent increase in the quarterly rate. The second provided for a 10 percent rate increase and was granted in the fourth quarter of fiscal 2007. Our total quarterly cash dividend is $0.088 per share.
Interest-bearing debt at the end of fiscal 2008 of $375.5 million increased $199.3 million from $176.2 million at the end of fiscal 2007. The increase related primarily to the issuance of $200 million new private placement notes discussed above and a significant increase in the fair value of our interest rate swap instrument, offset by a scheduled $3.0 million payment we made during the fourth quarter of fiscal 2008 on our private placement notes. Debt repayments made during fiscal 2007 totaled $3.0 million.
At the end of fiscal 2007, we had two interest rate swap agreements in place. One of these agreements expired during the fourth quarter of fiscal 2008. The fair value of our remaining interest rate swap arrangement, as further described in Note 17, was $0.5 million at the end of fiscal 2008 compared to a combined negative $1.8 million at the end of fiscal 2007. The fair values of the swap arrangements change based on fluctuations in market interest rates. Such changes are not included in net earnings of the related period. Instead, they are reflected as adjustments to our consolidated assets and/or liabilities. At the end of fiscal 2008, the portion of our total interest-bearing debt that was effectively converted to a variable-rate basis through our swap arrangements was $50.0 million. These interest rate swaps had the effect of decreasing total interest expense by $0.3 million in fiscal 2008 and increasing interest expense by $0.6 million and $0.3 million in fiscal years 2007 and 2006, respectively.
The only usage against our unsecured revolving credit facility at the end of fiscal years 2008 and 2007 represented outstanding standby letters of credit totaling $13.1 million at each date. The provisions of our private placement notes and unsecured credit facility require that we adhere to certain covenant restrictions and maintain certain performance ratios. We were in compliance with all such restrictions and performance ratios during fiscal 2008 and expect to remain in compliance in the future.
In fiscal 2008, we received $6.5 million related to the issuance of shares in connection with stock-based benefit plans. This compares to receiving $50.4 million and $37.0 million in fiscal 2007 and fiscal 2006, respectively.
During fiscal 2008, we repatriated $23.9 million of undistributed foreign earnings.
We believe cash on hand, cash generated from operations, and our borrowing capacity will provide adequate liquidity to fund near term and future business operations and capital needs.
The company previously leased a facility in the UK under an agreement that expired in March 2008. Under the terms of the lease, the company is required to perform the maintenance and repairs necessary to address the general dilapidation of the facility over the lease term. The ultimate cost of this provision to the company is dependent on a number of factors including, but not limited to, the future use of the facility by the lessor and whether the company chooses and is permitted to renew the lease term. The company has estimated the cost of these maintenance and repairs to be between $0 and $3 million, depending on the outcome of future plans and negotiations. Based on existing circumstances, it is estimated that these costs will most likely approximate $1.0 million. As a result, this amount has been recorded as a liability reflected under the caption Other Liabilities in the Consolidated Balance Sheet as of May 31, 2008. Based on circumstances existing in fiscal 2007, the amount recorded in the Consolidated Balance Sheet as of June 2, 2007 was $0.5 million.
The company has a lease obligation in the UK until May 2014 for a facility that it previously exited. The company believes it will be able to assign or sublet the lease for the majority of the remaining lease term to another tenant at current market rates. However, current market rates for comparable office space are lower than the rental payments owed under the lease agreement. As such, the company would remain liable to pay the difference. As a result, the company recorded a pre-tax charge of $1.4 million in fiscal 2006 for the expected loss under the arrangement. The corresponding impact of this charge on fiscal 2006 net earnings was $0.9 million, net of a $0.5 million tax benefit, or approximately $0.01 per diluted share. As of May 31, 2008 and June 2, 2007, the future cost of this arrangement was estimated to be $2.0 million and $1.4 million, respectively. Accordingly this amount is reflected within Other Liabilities on the Consolidated Balance Sheets as of these dates.
The company is involved in legal proceedings and litigation arising in the ordinary course of business. It is the companys opinion that the outcome of such proceedings and litigation currently pending will not materially affect its Consolidated Financial Statements.
The companys fiscal year ends on the Saturday closest to May 31. The fiscal years ended May 31, 2008 and June 2, 2007 each included 52 weeks of operations. In contrast, fiscal year 2006, which ended on June 3, 2006, included 53 weeks of operations. This is the basis upon which weekly-average data is presented. The extra week in fiscal 2006 was required to realign our fiscal calendar with the actual calendar months. This realignment is required approximately every six years.
Contractual obligations associated with our ongoing business and financing activities will result in cash payments in future periods. The following table summarizes the amounts and estimated timing of these future cash payments. Further information regarding debt obligations can be found in Note 10 to the Consolidated Financial Statements. Likewise, further information related to operating leases can be found in Note 11.
|(In millions)||Payments due by fiscal year|
|Estimated interest on debt|
|Pension plan funding(4)||3.0||3.0|||||||
indicated do not include the recorded fair value of interest rate swap
(2)Estimated future interest payments on our outstanding debt obligations are based on interest rates as of May 31, 2008. Actual cash outflows may differ significantly due to changes in underlying interest rates and timing of principal payments.
(3)Purchase obligations consist of non-cancelable purchase orders and commitments for goods, services, and capital assets.
(4)Pension funding commitments are defined as the estimated minimum funding requirements to be made in the following 12-month period. As of May 31, 2008, the total accumulated benefit obligation for our domestic and international employee pension benefit plans was $345.6 million.
(5)Represents the recorded dividend payable as of May 31, 2008. Future dividend payments are not considered contractual obligations until declared.
(6)Other contractual obligations primarily represent long-term commitments related to deferred and supplemental employee compensation benefits,other post employment benefits, and minimum designer royalty payments.
(7)Total balance is reflected as a liability in the Consolidated Balance Sheet at May 31, 2008.
We provide certain guarantees to third parties under various arrangements in the form of product warranties, loan guarantees, standby letters of credit, lease guarantees, performance bonds, and indemnification provisions. These arrangements are accounted for and disclosed in accordance with FIN 45, Guarantors Accounting and Disclosure Requirement for Guarantees, Including Indirect Guarantees of Indebtedness of Others as described in Note 19 to the Consolidated Financial Statements.
Variable Interest Entities
On occasion, we provide financial support to certain independent dealers in the form of term loans, lines of credit, and loan guarantees. At May 31, 2008 and June 2, 2007, we were not considered the primary beneficiary of any such dealer relationships as defined by FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46(R)) and therefore, no entities were included as VIEs as of these dates.
The risks and rewards associated with our interests in these dealerships are primarily limited to our outstanding loans and guarantee amounts. As of May 31, 2008 and June 2, 2007, our maximum exposure to potential losses related to outstanding loans to these dealerships totaled $3.2 million and $4.0 million, respectively. Information on our exposure related to outstanding loan guarantees provided to such entities is included in Note 19 to the Consolidated Financial Statements.
During fiscal 2006, a qualifying triggering event occurred with a previously consolidated VIE which resulted in reconsideration under FIN 46(R). Based on this reconsideration, it was determined we were no longer considered the primary beneficiary. As such, we ceased consolidation of the independent dealership in the first quarter of fiscal 2006. Net earnings in the first quarter of fiscal 2006 were not significantly affected by the consolidation of this VIE. This is because the net earnings of the VIE were primarily attributed to, and therefore offset by, minority interest of $0.7 million.
Our goal is to report financial results clearly and understandably. We follow U.S. generally accepted accounting principles in preparing our Consolidated Financial Statements, which require us to make certain estimates and apply judgments that affect our financial position and results of operations. We continually review our accounting policies and financial information disclosures. These policies and disclosures are reviewed at least annually with the Audit Committee of the Board of Directors. Following is a summary of our more significant accounting policies that require the use of estimates and judgments in preparing the financial statements.
As described in the Executive Overview, the majority of our products and services are sold through one of four channels: Independent contract furniture dealers and licensees, owned contract furniture dealers, direct to end customers, and independent retailers. We recognize revenue on sales to independent dealers, licensees, and retailers once the product is shipped and title passes to the buyer. When we sell product directly to the end customer or to owned dealers, we recognize revenue once the product and services are delivered and installation is substantially complete.
Amounts recorded as net sales generally include freight charged to customers, with the related freight expenses recognized within cost of sales. Items such as discounts off list price, rebates, and other sale-related marketing program expenses are recorded as reductions to net sales. We record accruals for rebates and other marketing programs, which require us to make estimates about future customer buying patterns and market conditions. Customer sales that reach (or fail to reach) certain levels can affect the amount of such estimates, and actual results could differ from our estimates.
We base our allowances related to receivables on known customer exposures, historical credit experience, and the specific identification of other potential problems, including the economic climate. These methods are applied to all major receivables, including trade, lease, and notes receivable. In addition, we follow a policy that consistently applies reserve rates based on the age of outstanding accounts receivable. Actual collections can differ from our historical experience, and if economic or business conditions deteriorate significantly, adjustments to these reserves may be required.
The accounts receivable allowance totaled $5.6 million and $4.9 million at May 31, 2008 and June 2, 2007, respectively. As a percentage of gross accounts receivable, these allowances totaled 2.6 percent and 2.5 percent, respectively. The year-over-year increase in the allowance percentage is primarily due to the volume increase in our non-North American Furniture Solutions segment and Mexico.
The carrying value of our goodwill assets as of May 31, 2008 and June 2, 2007, totaled $40.2 million and $39.1 million, respectively. The increase in goodwill balances relates to our acquisition of Brandrud. We account for our goodwill assets in accordance with Statement of Financial Accounting Standards (SFAS) No. 142. Under this accounting guidance, we are required to perform an annual test on our goodwill assets by reporting unit to determine whether the asset values are impaired. If impairment is determined, we are required to reduce the net carrying value of the assets to their estimated fair market value.
Our impairment-testing model is based on the present value of projected cash flows and a residual value. In completing the test under this approach, we assume that the value of a business today is derived from the cash flows it will generate in the future. We also assume that such future cash flows can be reasonably estimated. While these projected cash flows reflect our best estimate of future reporting unit performance, actual cash flows could differ significantly.
The results of this test, performed in the fourth quarter of fiscal 2008, indicated that our net goodwill asset values were not impaired. We employed a market-based approach in selecting the discount rates used in our analysis. By this, we mean the discount rates selected represent market rates of return equal to what we believe a reasonable investor would expect to achieve on investments of similar size to our reporting units. We believe the discount rates selected in our testing are conservative in that, in all cases, they exceed the estimated weighted average cost of capital for our business as a whole. The results of the impairment test are sensitive to changes in the discount rates. Our testing performed in fiscal 2008 indicated that a substantial increase in the discount rates utilized would be required before the results would indicate a potential impairment issue.
We stand behind our products and keep our promises to customers. From time to time, quality issues arise resulting in the need to incur costs to correct problems with products or services. We have established warranty reserves for the various costs associated with these guarantees. General warranty reserves are based on historical claims experience and periodically adjusted for business levels. Specific reserves are established once an issue is identified. The valuation of such reserves is based on the estimated costs to correct the problem. Actual costs may vary and may result in an adjustment to our reserves.
Inventories are valued at the lower of cost or market. The inventories at the majority of our manufacturing operations are valued using the last-in, first-out (LIFO) method, whereas inventories of certain other subsidiaries are valued using the first-in, first-out (FIFO) method. We establish reserves for excess and obsolete inventory, based on prevailing circumstances and judgment for consideration of current events, such as economic conditions, that may affect inventory. The amount of reserve required to record inventory at lower of cost or market may be adjusted as conditions change.
Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse.
We have net operating loss (NOL) carryforwards available in certain jurisdictions to reduce future taxable income. We also have foreign tax credits available in certain jurisdictions to reduce future tax due. Future tax benefits for NOL carryforwards and foreign tax credits are recognized to the extent that realization of these benefits is considered more likely than not. We base this determination on the expectation that related operations will be sufficiently profitable or various tax planning strategies available to us will enable us to utilize the NOL carryforwards and/or foreign tax credits. When information becomes available that raises doubts about the realization of a deferred income tax asset, a valuation allowance is established.
With the assistance of independent actuaries, we establish reserves for workers compensation and general liability exposures. The reserves are established based on expected future claims for incurred losses. We also establish reserves for health and dental benefit exposures based on historical claims information along with certain assumptions about future trends. The methods and assumptions used to determine the liabilities are applied consistently, although actual claims experience can vary. We also maintain insurance coverage for certain risk exposures through traditional premium-based insurance policies.
Pension and other
The determination of the obligation and expense for pension and other post-retirement benefits depends on certain actuarial assumptions. Among the most significant of these assumptions is the discount rate, interest-crediting rate, and expected long-term rate of return on plan assets. We determine these assumptions as follows.
Discount RateThis assumption is established at the end of the fiscal year based on high-quality corporate bond yields. We utilize the services of an independent actuarial firm to analyze and recommend an appropriate rate. For our domestic pension and other post-retirement benefit plans, the actuary uses a cash flow matchingtechnique, which compares the estimated future cash flows of the plan to a published discount curve showing the relationship between interest rates and duration for hypothetical zero-coupon fixed income investments. We set the discount rate for our international pension plan based on the yield level of a commonly used corporate bond index in that jurisdiction. Because the average duration of the bonds underlying this index is less than that of our international pension plan liabilities, the index yield is used as a reference point. The final discount rate, which takes into consideration the index yield and the difference in comparative durations, is based on a recommendation from our independent actuarial consultant.
The discount rates selected for our domestic pension and post-retirement benefit plans at the end of fiscal 2008 were higher than those established at the end of fiscal 2007. With all other assumptions and values held constant, this change would result in a decrease in our pension and post-retirement benefit plan expenses for our 2009 fiscal year, which began on June 1, 2008. Similarly, the discount rate selected for our international pension plan at the end of the current year was higher than the rate established at the end of fiscal 2007. This change would also result in a decrease in our international pension plan expense for fiscal 2009 if all other assumptions were held constant.
Interest Crediting RateWe use this assumption in accounting for our primary domestic pension plan, which is a cash balance-type plan. The rate, which represents the annual rate of interest applied to each plan participants account balance, is established at an assumed level, or spread, below the discount rate. We base this methodology on the historical spread between the 30-year U.S. Treasury and high-quality corporate bond yields. This relationship is examined annually to determine whether the methodology is appropriate.
Expected Long-Term Rate of ReturnWe base this assumption on our long-term assumed rates of return for equities and fixed income securities, weighted by the allocation of the invested assets of the pension plan. We consider risk factors specific to the various classes of investments and advice from independent actuaries in establishing this rate. Changes in the investment allocation of plan assets would impact this assumption. A shift to a higher relative percentage of fixed income securities, for example, would result in a lower assumed rate.
While this assumption represents our long-term market return expectation, actual asset returns can differ from year-to-year. Such differences give rise to actuarial gains and losses. In years where actual market returns are lower than the assumed rate, an actuarial loss is generated. Conversely, an actuarial gain results when actual market returns exceed the assumed rate in a given year. As of May 31, 2008, and June 2, 2007, the net actuarial loss associated with our employee pension and post-retirement benefit plans totaled approximately $107.4 million and $92.4 million, respectively. At both dates, the majority of this unrecognized loss was associated with lower than expected plan asset returns.
For purposes of determining annual net pension expense, we use a calculated method for determining the market-related value of plan assets. Under this method, we recognize the change in fair value of plan assets systematically over a five-year period. Accordingly, a portion of our net actuarial loss is deferred. The remaining portion of the net actuarial loss is subject to amortization expense each year. The amortization period used in determining this expense is the estimated remaining working life of active pension plan participants. We currently estimate this period to be approximately 12 years. As of the beginning of fiscal year 2008, the deferred net actuarial loss (i.e., the portion of the total net actuarial loss not subject to amortization) was approximately $14.7 million.
Refer to Note 12 to the Consolidated Financial Statements for more information regarding costs and assumptions used for employee benefit plans.
We evaluate long-lived assets and acquired businesses for indicators of impairment when events or circumstances indicate that a risk may be present. Our judgments regarding the existence of impairment are based on market conditions, operational performance, and estimated future cash flows. If the carrying value of a long-lived asset is considered impaired, an impairment charge is recorded to adjust the asset to its estimated fair value.
We view stock-based compensation as a key component of total compensation for certain of our employees, non-employee directors and officers. We account for these programs, which include grants of restricted stock, restricted stock units, performance share units, employee stock purchases, and stock options, in accordance with SFAS 123(R). Under this guidance we recognize compensation expense related to each of these share-based arrangements. We utilize the Black-Scholes option pricing model in estimating the fair value of stock options issued in connection with our compensation program. This pricing model requires the use of several input assumptions. Among the most significant of these assumptions are the expected volatility of our common stock price, and the expected timing of future stock option exercises.
Expected VolatilityThis represents a measure, expressed as a percentage, of the expected fluctuation in the market price of our common stock. As a point of reference, a high volatility percentage would assume a wider expected range of market returns for a particular security. All other assumptions held constant, this would yield a higher stock option valuation than a calculation using a lower measure of volatility. In measuring the fair value of stock options issued during fiscal year 2008, we utilized an expected volatility of 28 percent.
Expected Term of OptionsThis assumption represents the expected length of time between the grant date of a stock option and the date at which it is exercised (option life). We assumed an average expected term of 5.5 years in calculating the fair values of the majority of stock options issued during fiscal 2008.
Refer to Note 14 for further discussion on our stock-based compensation plans.
In the ordinary course of business, we encounter matters that raise the potential for contingent liabilities. In evaluating these matters for accounting treatment and disclosure, we are required to apply judgment in order to determine the probability that a liability has been incurred. We are also required to measure, if possible, the dollar value of such liabilities in determining whether or not recognition in our financial statements is required. This process involves the use of estimates which may differ from actual outcomes. Refer to Note 19 to the Consolidated Financial Statements for more information relating to contingencies.
Refer to Note 1 to the Consolidated Financial Statements for information related to new accounting standards.
Certain statements in this filing 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. Such statements are based on managements belief, assumptions, current expectations, estimates and projections about the office furniture industry, the economy and the company itself. Words like anticipates, believes, confident, estimates, expects, forecast, likely, plans, projects, and should, and variations of such words and similar expressions identify 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, expense, likelihood, and degree of occurrence. These risks include, without limitation, employment and general economic conditions in the U.S. and in our international markets, the increase in white collar employment, the willingness of customers to undertake capital expenditures, the types of products purchased by customers, the possibility of order cancellations or deferrals by customers, competitive pricing pressures, the availability and pricing of direct materials, our reliance on a limited number of suppliers, currency fluctuations, the ability to increase prices to absorb the additional costs of direct materials, the financial strength of our dealers, the financial strength of our customers, the mix of our products purchased by customers, our ability to attract and retain key executives and other qualified employees, our ability to continue to make product innovations, the strength of the intellectual property relating to our products, the success of newly introduced products, our ability to serve all of our markets, possible acquisitions, divestitures or alliances, the outcome of pending litigation or governmental audits or investigations, and other risks identified in this Form 10-K and our other filings with the Securities and Exchange Commission. Therefore, actual results and outcomes may materially differ from what we express or forecast. Furthermore, Herman Miller, Inc., takes no obligation to update, amend, or clarify forward-looking statements.
Item 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company manufactures, markets, and sells its products throughout the world and, as a result, is subject to changing economic conditions, which could reduce the demand for its products.
The company is exposed to risks arising from price changes for certain direct materials and assembly components used in its operations. The largest such costs incurred by the company are for steel, plastics, textiles, wood particleboard, and aluminum components. Overall, commodity prices were mostly flat during fiscal year 2008 until the fourth quarter when prices began to increase sharply. The full year impact of rising commodity prices was in the range of $2 million to $4 million. Commodity prices increased during fiscal 2007, particularly during the first half of the year. For the full year, the company estimates rising commodity prices added between $14 million and $16 million to its consolidated cost of sales. During fiscal 2006, commodities were relatively stable with slight improvements to pricing over the prior year.
The market price of plastics and textiles are sensitive to the cost of oil and natural gas. Oil and natural gas prices increased dramatically during fiscal 2008 and we began to see the effect of that on our input costs, especially in the fourth quarter of the year. In fiscal 2007 petroleum prices were volatile, however by the end of the year they had declined somewhat. Petroleum prices increased throughout fiscal year 2006 in what, prior to the context the current year has provided, seemed like a substantial increase. As a result, the cost of plastics and textiles increased during fiscal year 2006 and moderated during fiscal 2007.
The company believes future market price increases on its key direct materials and assembly components are likely. Consequently, it views the prospect of such increases as an outlook risk to the business.
The company manufactures its products in the United States, United Kingdom, and China. It also sources completed products and product components from outside the United States. The companys completed products are sold in numerous countries around the world. Sales in foreign countries as well as certain expenses related to those sales are transacted in currencies other than the companys reporting currency, the U.S. Dollar. Accordingly, production costs and profit margins related to these sales are affected by the currency exchange relationship between the countries where the sales take place and the countries where the products are sourced or manufactured. These currency exchange relationships can also affect the companys competitive positions within these markets.
In the normal course of business, the company enters into contracts denominated in foreign currencies. The principal foreign currencies in which the company conducts its business are the British Pound, Euro, Canadian Dollar, Japanese Yen, Mexican Peso, and Chinese Renminbi. In the fourth quarter of fiscal 2008, the company entered into five forward currency instruments in order to offset exposure denominated in non-functional currency. Three contracts were placed to offset 4.0 million of Euro net asset exposure denominated in non-functional currency and two contracts were placed to offset $6.0 million US Dollar net liability exposure in China. Similarly, in the fourth quarter of fiscal 2007, the company entered into three separate forward currency contracts in order to offset 4.0 million of its Euro net asset exposure denominated in a non-functional currency. In both years, the instruments were marked to market at the end of the period, with changes in fair value reflected in net earnings. At May 31, 2008, the fair value of the forward currency instruments was $0.1 million, and negligible at June 2, 2007.
Net gains arising from remeasuring all foreign currency transactions into the appropriate functional currency, which were included in net earnings, were $0.1 million, negligible and $0.3 million for the years ended May 31, 2008, June 2, 2007 and June 3, 2006, respectively. Additionally, the cumulative effect of translating the balance sheet and income statement accounts from the functional currency into the United States dollar reduced the accumulated comprehensive loss component of total shareholders equity by $4.1 million, $3.3 million, and $1.2 million for the years ended May 31, 2008, June 2, 2007, and June 3, 2006, respectively.
The company maintains fixed-rate debt for which changes in interest rates generally affect fair market value but not earnings or cash flows. The company does not have an incentive to prepay fixed rate debt prior to maturity, and as a result, interest rate risk and changes in fair market value should not have a significant impact on such debt until the company would be required to refinance it. As of May 31, 2008, the company has one interest rate swap agreement that effectively converts $50.0 million of fixed-rate debt securities to a variable rate. As of the end of fiscal year 2007, the company had two interest rate swaps that effectively converted $53 million in total of fixed-rate debt to a variable-rate basis. This debt is subject to changes in interest rates, which, if significant, could have a material impact on the companys financial results. The interest rate swap derivative instruments are held and used by the company as a tool for managing interest rate risk. They are not used for trading or speculative purposes. The counterparties to these swap instruments are large financial institutions that the company believes are of high-quality creditworthiness. While the company may be exposed to potential losses due to the credit risk of non-performance by these counterparties, such losses are not anticipated.
The combined fair market value of effective swap instruments was $0.5 million and negative $1.8 million at May 31, 2008 and June 2, 2007, respectively. The impact of these swap instruments on total interest expense was a reduction to interest expense of $0.4 million in fiscal 2008 and an addition to interest expense of $0.6 million and $0.3 million in fiscal 2007 and 2006, respectively. All cash flows related to the companys interest rate swap instruments are denominated in U.S. dollars. For further information, refer to Notes 16 and 17 to the Consolidated Financial Statements.
As of May 31, 2008, the weighted-average interest rate on the companys variable-rate debt was approximately 5.6 percent. Based on the level of variable-rate debt outstanding as of that date, a 1 percentage-point increase in the weighted-average interest rate would increase the companys annual pre-tax interest expense by approximately $0.5 million.
Expected cash flows (notional amounts) over the next five years and thereafter related to debt instruments are as follows.
|Wtd. average interest rate = 6.69%|
|Derivative Financial Instruments Related to|
|Debt Interest Rate Swaps:|
|Pay variable/receive fixed||$||||$||||$||50.0||$||||$||||$||||$||50.0|
|Pay interest rate = 5.55% (at May 31, 2008)|
|Receive interest rate = 7.125%|
(1)Amount does not include the recorded fair value of the swap instruments, which totaled $0.5 million at the end of fiscal 2008.
Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Set forth below is a summary of the quarterly operating results on a consolidated basis for the years ended May 31, 2008, June 2, 2007, and June 3, 2006. Refer to Managements Discussion and Analysis provided in Item 7 and the Notes to the Consolidated Financial Statements for further disclosure of significant accounting transactions that may have affected the quarterly operating results for each of the periods presented.
|(In millions, except per share data)||First|
|Earnings per sharebasic||.54||.67||.66||.71|
|Earnings per sharediluted(1)||.54||.67||.65||.71|
|Earnings per sharebasic||.44||.57||.50||.50|
|Earnings per sharediluted(1)(2)||.43||.56||.50||.50|
|Earnings per sharebasic||.34||.41||.33||.38|
|Earnings per sharediluted||.34||.40||.33||.38|
(1)The sum of the quarters does not
equal the annual balance reflected in the Consolidated Statements of Operations
due to rounding associated with the calculations on an individual quarter
(2)The fourth quarter of fiscal year 2007 includes adjustments to various tax accruals resulting in a reduction of income taxes of $3.4 million or $0.05 diluted earnings per share in the quarter.
(3)The first quarter of fiscal year 2006 included 14 weeks of operations.
|Consolidated Statements of Operations||Fiscal Years Ended|
|(In millions, except per share data)||May 31, 2008||June 2, 2007||June 3, 2006|
|Cost of sales||1,313.4||1,273.0||1,162.4|
|Selling, general, and administrative||395.8||395.8||371.7|
|Design and research||51.2||52.0||45.4|
|Total operating expenses||452.1||447.8||417.1|
|Other Expenses (Income):|
|Interest and other investment income||(3.8||)||(4.1||)||(4.9||)|
|Net other expenses||16.2||11.1||10.1|
|Earnings before income taxes and minority interest||230.4||187.0||147.6|
|Income tax expense||78.2||57.9||47.7|
|Minority interest, net of income tax||(0.1||)||||0.7|
|Earnings per share basic||$||2.58||$||2.01||$||1.46|
|Earnings per share diluted||$||2.56||$||1.98||$||1.45|
|Consolidated Balance Sheets|
|(In millions, except share and per share data)||May 31, 2008||June 2, 2007|
|Cash and cash equivalents||$||155.4||$||76.4|
|Accounts receivable, less allowances of $5.6 in 2008|
|and $4.9 in 2007||209.0||188.1|
|Prepaid expenses and other||58.0||48.3|
|Total Current Assets||493.2||384.7|
|Property and Equipment:|
|Land and improvements||19.0||18.9|
|Buildings and improvements||139.4||137.2|
|Machinery and equipment||547.4||543.3|
|Construction in progress||17.4||17.6|
|Less: accumulated depreciation||(526.9||)||(520.4||)|
|Net Property and Equipment||196.3||196.6|
|Liabilities and Shareholders' Equity|
|Current maturities of long-term debt||||3.0|
|Total Current Liabilities||310.5||284.5|
|Long-term debt, less current maturities||375.5||173.2|
|Preferred stock, no par value (10,000,000 shares authorized,|
|Common stock, $0.20 par value (240,000,000 shares|
|authorized, 55,706,997 and 62,919,425 shares issued and|
|outstanding in 2008 and 2007, respectively)||11.1||12.6|
|Additional paid-in capital|||||
|Accumulated other comprehensive loss||(60.1||)||(51.6||)|
|Key executive deferred compensation||(4.3||)||(3.5||)|
|Total Shareholders' Equity||23.4||155.3|
|Total Liabilities and Shareholders' Equity||$||783.2||$||666.2|
of Shareholders' Equity
(In millions, except share data)
|Shares of Common Stock||Common Stock||Additional Paid-in Capital||Retained Earnings||Accumulated Other Comprehensive Loss||Key Exec. Deferred Comp.||Total Shareholders' Equity|
|Balance, May 28, 2005||69,585,989||$||13.9||$||||$||227.3||$||(64.4||)||$||(6.3||)||$||170.5|
|Foreign currency translation adjustment||||||||||1.2||||1.2|
|Minimum pension liability (net of tax of $0.4 million)||||||||||0.3||||0.3|
|Unrealized holding loss (net of tax of $0.2 million)||||||||||(0.4||)||||(0.4||)|
|Total comprehensive income||100.3|
|Cash dividends declared ($.305 per share)||||||||(20.6||)||||||(20.6||)|
|Exercise of stock options||1,451,143||0.3||33.5||||||||33.8|
|Employee stock purchase plan||114,659||||3.0||||||||3.0|
|Tax benefit relating to stock options||||||3.7||||||||3.7|
|Repurchase and retirement of common stock||(5,124,306||)||(1.0||)||(40.4||)||(113.7||)||||||(155.1||)|
|Restricted stock units earned||||||||||||1.1||1.1|
|Stock grants earned||||||||||||1.5||1.5|
|Balance, June 3, 2006||66,034,452||$||13.2||$||||$||192.2||$||(63.3||)||$||(3.7||)||$||138.4|
|Foreign currency translation adjustment||||||||||3.3||||3.3|
|Pension and post-retirement liability adjustments (net|
|of tax of $33.5 million)||||||||||58.3||||58.3|
|Unrealized holding gain (net of negligible tax)||||||||||0.1||||0.1|
|Total comprehensive income||190.8|
|Cash dividends declared ($0.328 per share)||||||||(21.0||)||||||(21.0||)|
|Exercise of stock options||1,886,326||0.4||46.9||||||||47.3|
|Employee stock purchase plan||102,808||||3.4||||||||3.4|
|Tax benefit relating to stock-based compensation||||||6.7||||||||6.7|
|Repurchase and retirement of common stock||(5,116,375||)||(1.0||)||(61.4||)||(102.5||)||||||(164.9||)|
|Restricted stock units compensation expense||||||2.4||||||(1.3||)||1.1|
|Restricted stock units released||1,527||||0.1||||||||0.1|
|Stock grants compensation expense||||||(1.1||)||||||1.8||0.7|
|Stock grants issued||5,050|||||||||||||
|Stock option compensation expense||||||2.5||||||||2.5|
|Deferred compensation plan||||||0.3||||||(0.3||)|||
|Adjustment to adopt SFAS 158 (net of tax of $28.2|
|Balance, June 2, 2007||62,919,425||$||12.6||$||||$||197.8||$||(51.6||)||$||(3.5||)||$||155.3|
|Foreign currency translation adjustment||||||||||4.1||||4.1|
|Pension liability adjustments (net of tax of $5.2 million||||||||||(12.6||)||||(12.6||)|
|Total comprehensive income||143.8|
|Cash dividends declared ($0.352 per share)||||||||(20.5||)||||||(20.5||)|
|Exercise of stock options||125,301||||2.9||||||||2.9|
|Employee stock purchase plan||118,801||||3.3||||||||3.3|
|Tax benefit relating to stock-based compensation||||||0.1||||||||0.1|
|Excess tax benefit relating to stock-based compensation||||||0.1||||||||0.1|
|Repurchase and retirement of common stock||(7,488,430||)||(1.5||)||(13.3||)||(251.9||)||||||(266.7||)|
|Restricted stock units compensation expense||||||0.6||||||||0.6|
|Restricted stock units released||2,892||||0.1||||||||0.1|
|Stock grants compensation expense||||||0.7||||||||0.7|
|Stock grants issued||12,922|||||||||||||
|Stock option compensation expense||||||3.0||||||||3.0|
|Deferred compensation plan||||||0.6||||||(0.8||)||(0.2||)|
|Performance share units compensation expense||||||1.4||||||||1.4|
|Cumulative effect of adopting FIN 48 (net of tax)||||||||(1.0||)||||||(1.0||)|
|Balance, May 31, 2008||55,706,997||$||11.1||$||||$||76.7||$||(60.||1)||$||(4.3||)||$||23.4|
|Consolidated Statements of Cash Flows||Fiscal Years Ended|
|(In millions)||May 31, 2008||June 2, 2007||June 3, 2006|
|Cash Flows from Operating Activities:|
|Adjustments to reconcile net earnings to net cash provided|
|by operating activities||61.3||8.6||51.2|
|Net Cash Provided by Operating Activities||213.6||137.7||150.4|
|Cash Flows from Investing Activities:|
|Notes receivable repayments||69.1||67.4||67.8|
|Notes receivable issued||(68.4||)||(66.8||)||(65.6||)|
|Short-term investment purchases||(11.9||)||(11.5||)||(11.6||)|
|Short-term investment sales||12.1||11.0||9.8|
|Proceeds from sales of property and equipment||0.3||7.9||1.6|
|Proceeds from disposal of owned dealers||0.9||||2.1|
|Net cash paid for acquisitions||(11.7||)||(3.5||)|||
|Net Cash Used for Investing Activities||(51.0||)||(37.4||)||(47.6||)|
|Cash Flows from Financing Activities:|
|Short-term debt repayments||(1.2||)|||||
|Long-term debt repayments||(4.0||)||(3.0||)||(13.0||)|
|Long-term debt borrowings||200.0|||||
|Common stock issued||6.5||50.4||37.0|
|Common stock repurchased and retired||(266.7||)||(164.9||)||(155.1||)|
|Excess tax benefits from stock-based compensation||0.1||6.7|||
|Net Cash Used for Financing Activities||(86.5||)||(131.5||)||(151.4||)|
|Effect of exchange rate changes on cash and cash equivalents||2.9||0.8||1.0|
|Net Increase (Decrease) in Cash and Cash Equivalents||79.0||(30.4||)||(47.6||)|
|Cash and cash equivalents, beginning of year||76.4||106.8||154.4|
|Cash and Cash Equivalents, End of Year||$||155.4||$||76.4||$||106.8|
Accounting and Reporting Policies
The following is a summary of significant accounting and reporting policies not reflected elsewhere in the accompanying financial statements.
The Consolidated Financial Statements include the accounts of Herman Miller, Inc., and its majority-owned domestic and foreign subsidiaries. The consolidated entities are collectively referred to as the company. All intercompany accounts and transactions, including any involving VIEs, have been eliminated in the Consolidated Financial Statements.
Description 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 companys products are sold primarily through independent contract office furniture dealers. Accordingly, accounts and notes receivable in the accompanying balance sheets are principally amounts due from the dealers.
The companys fiscal year ends on the Saturday closest to May 31. Fiscal 2008, the year ended May 31, 2008 contained 52 weeks. Fiscal years ended June 2, 2007 and June 3, 2006, contained 52 and 53 weeks, respectively. An extra week in the companys fiscal year is required approximately every six years in order to realign its fiscal calendar-end dates with the actual calendar months.
The functional currency for foreign subsidiaries is the local currency. The cumulative effects of translating the balance sheet accounts from the functional currency into the United States dollar using fiscal year-end exchange rates and translating revenue and expense accounts using average exchange rates for the period is reflected as a component of Accumulated other comprehensive loss in the Consolidated Balance Sheets. The financial statement impact resulting from remeasuring all foreign currency transactions into the appropriate functional currency, which was included in Other Expenses (Income) in the Consolidated Statements of Operations was a net gain of $0.1 million for the year ended May 31, 2008. For the years ended June 2, 2007 and June 3, 2006, the financial statement impact was a negligible net gain and a net gain of $0.3 million, respectively.
The company holds cash equivalents as part of its cash management function. Cash equivalents include money market funds, time deposit investments, and treasury bills with original maturities of less than three months. The carrying value of cash equivalents, which approximates fair value, totaled $90.7 million and $22.0 million as of May 31, 2008, and June 2, 2007, respectively. All cash and cash equivalents are high-credit quality financial instruments, and the amount of credit exposure to any one financial institution or instrument is limited.
The company maintains a portfolio of short-term investments primarily comprised of investment-grade, fixed-income securities. These investments are held by the companys wholly owned insurance captive and are considered available-for-sale as defined in Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. Accordingly, they have been recorded at fair market value based on quoted market prices, with the resulting net unrealized holding gains or losses reflected net of tax as a component of Accumulated Other Comprehensive Loss in the Consolidated Balance Sheets.
All marketable security transactions are recognized on the trade date. Realized gains and losses on disposal of available-for-sale investments are included in Interest and other investment income in the Consolidated Statements of Operations. Net investment income recognized in the Consolidated Statements of Operations for available-for-sale investments totaled $0.7 million, $0.8 million, and $0.7 million for the years ended May 31, 2008, June 2, 2007, and June 3, 2006, respectively.
The following is a summary of the carrying and market values of the companys short-term investments as of the dates indicated.
|May 31, 2008|
|U.S. Government & agency debt||$||4.8||$||0.2||$||||$||5.0|
|June 2, 2007|
|U.S. Government & agency debt||$||3.9||$||||$||(0.1||)||$||3.8|
Maturities of short-term investments as of May 31, 2008, are as follows.
|(In millions)||Cost||Market Value|
|Due within one year||$||2.3||$||2.2|
|Due after one year through five years||8.7||8.7|
|Due after five years||4.9||4.8|
Reserves for uncollectible accounts receivable balances are based on known customer exposures, historical credit experience, and the specific identification of other potential problems, including the economic climate. Balances are written off against the reserve once the company determines the probability of collection to be remote. The company generally does not require collateral or other security on trade accounts receivable.
Inventories are valued at the lower of cost or market. The inventories at the majority of the companys manufacturing operations are valued using the last-in, first-out (LIFO) method, whereas inventories of certain other of the companys subsidiaries are valued using the first-in, first-out (FIFO) method. The company establishes reserves for excess and obsolete inventory, based on prevailing circumstances and judgment for consideration of current events, such as economic conditions, that may affect inventory. Further information on the companys recorded inventory balances can be found in Note 4.
Property, Equipment, and
Property and equipment are stated at cost. The cost is depreciated over the estimated useful lives of the assets, using the straight-line method. Estimated useful lives range from 3 to 10 years for machinery and equipment and do not exceed 40 years for buildings. Leasehold improvements are depreciated over the lesser of the lease term or the useful life of the asset, not to exceed 10 years. The company capitalizes certain external and internal costs incurred in connection with the development, testing, and installation of software for internal use. Software for internal use is included in property and equipment and is depreciated over an estimated useful life not exceeding 5 years.
During the first quarter of fiscal 2006, the company finalized the sale of a warehouse/storage facility in West Michigan that the company previously exited. As a result of the sale, the company received proceeds of $0.7 million and recognized a gain on sale of $0.2 million. During the fourth quarter of fiscal 2007, the company completed the sale of its Canton, Georgia facility which was exited in fiscal 2004. The company received net cash consideration of $7.5 million, for assets with a carrying value of $7.5 million. This resulted in a negligible pre-tax gain.
As of the end of fiscal 2008, outstanding commitments for future capital purchases approximated $7.4 million.
The company assesses the recoverability of its long-lived assets in accordance with the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This assessment is performed whenever events or circumstances such as current and projected future operating losses or changes in the business climate indicate that the carrying amount may not be recoverable. Assets are grouped and evaluated at the lowest level for which there are independent and identifiable cash flows. The company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to the estimated future undiscounted cash flows (without interest charges) expected to result from the use of the asset. If the carrying amount of the asset exceeds the expected future cash flows, the company measures and records an impairment loss for the excess of the carrying value of the asset over its fair value. The estimation of fair value is made by discounting the expected future cash flows at the rate the company uses to evaluate similar potential investments based on the best information available at that time.
Goodwill and Other
The companys recorded goodwill at May 31, 2008 and June 2, 2007, is associated with the North American Furniture Solutions segment, which is described in further detail in Note 20. The company is required to test the carrying value of goodwill for impairment at the reporting unit level annually or more frequently if a triggering event occurs under the provisions of SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142). As a matter of practice, the company performs the required annual impairment testing of goodwill during the fourth quarter of each fiscal year. The annual testing performed each year indicated the present value of discounted cash flows of the reporting unit exceeded the recorded carrying value of the companys goodwill assets, and accordingly no impairment charge was required for the years ending May 31, 2008, June 2, 2007, and June 3, 2006.
SFAS 142 also requires the company to evaluate its acquired intangible assets to determine whether any have indefinite useful lives. Under this accounting standard, intangible assets with indefinite useful lives, if any, are not subject to amortization. The company has other intangible assets, consisting of certain trademarks and tradenames valued at approximately $3.2 million, which have indefinite useful lives and are evaluated in a manner consistent with goodwill. The company amortizes its other intangible assets over their remaining useful lives using the straight-line method over periods ranging from 5 to 17 years.
Other intangible assets are comprised of patents, trademarks, and intellectual property rights with a combined gross carrying value and accumulated amortization of $25.7 million and $7.6 million, respectively as of May 31, 2008. As of June 2, 2007, these amounts totaled $14.9 million and $5.5 million, respectively.
Estimated amortization expense for existing intangible assets as of May 31, 2008, for each of the succeeding five fiscal years is as follows.
The notes receivable are primarily from certain independent contract office furniture dealers. These notes are the result of dealers in transition either through a change in ownership or general financial difficulty. The notes generally are collateralized by the assets of the dealers and bear interest based on the prevailing prime rate. Recorded reserves are based on historical credit experience, collateralization levels, and the specific identification of other potential collection problems. Interest income relating to these notes in fiscal years 2008, 2007, and 2006 totaled $0.4 million for each year.
As a result of maintaining a consolidated cash management system, the company utilizes controlled disbursement bank accounts. These accounts are funded as checks are presented for payment, not when checks are issued. Any resulting book overdraft position is included in current liabilities as unfunded checks.
The company is partially self-insured for general liability, workers compensation, and certain employee health and dental benefits under insurance arrangements that provide for third-party coverage of claims exceeding the companys loss retention levels. The companys retention levels designated within significant insurance arrangements as of May 31, 2008, are as follows.
|General liability and auto liability/physical damage||$1.00 million per occurrence|
|Workers' compensation and property||$0.75 million per occurrence|
|Health benefits||$0.20 million per employee|
The companys policy is to accrue amounts equal to the actuarially-determined liabilities for loss and loss adjustment expenses, which are included in Other Liabilities in the Consolidated Balance Sheets. The actuarial valuations are based on historical information along with certain assumptions about future events. Changes in assumptions for such matters as legal actions, medical costs, and changes in actual experience could cause these estimates to change. The general and workers compensation liabilities are managed through the companys wholly-owned insurance captive.
and Other Related Costs
Research, development, pre-production, and start-up costs are expensed as incurred. Research and development (R&D) costs consist of expenditures incurred during the course of planned search and investigation aimed at discovery of new knowledge useful in developing new products or processes. R&D costs also include the significant enhancement of existing products or production processes and the implementation of such through design, testing of product alternatives, or construction of prototypes. Royalty payments made to designers of the companys products as the products are sold are not included in research and development costs, as they are a variable cost based on product sales. Research and development costs included in Design and Research expense in the accompanying Consolidated Statements of Operations were $38.8 million, $42.1 million, and $36.7 million, in fiscal 2008, 2007, and 2006, respectively.
Advertising costs are expensed as incurred and are included in Selling, general, and administrative expense in the accompanying Consolidated Statements of Operations. Advertising costs were $3.4 million, $3.2 million, and $3.2 million, in fiscal 2008, 2007, and 2006, respectively.
Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse.
The company has several stock-based compensation plans, which are described fully in Note 14. In December 2004, the FASB issued a revision of SFAS No. 123, Share-Based Payment (SFAS 123(R)), which supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. The company adopted the provisions of SFAS 123(R) in the first quarter of fiscal 2007.
Prior to the adoption of SFAS 123(R), the company accounted for its stock-based compensation plans under the recognition and measurement principles of APB 25 and related Interpretations. Under this method, compensation expense related to stock options was recognized only if the market price of the stock, underlying an award on the date of grant, exceeded the related exercise price. Expense attributable to certain stock-based awards, such as restricted stock grants and restricted stock units, was recognized in the companys reported results under APB 25.
Earnings per Share
Basic earnings per share (EPS) excludes the dilutive effect of common shares that could potentially be issued, due to the exercise of stock options or the vesting of restricted shares, and is computed by dividing net earnings by the weighted-average number of common shares outstanding for the period. Diluted EPS for fiscal years 2008, 2007, and 2006, was computed by dividing net earnings by the sum of the weighted-average number of shares outstanding, plus all dilutive shares that could potentially be issued. Refer to Note 13, for further information regarding the computation of EPS.
The company recognizes revenue on sales through its network of independent contract furniture dealers and independent retailers once the related product is shipped and title passes to the dealer. In situations where products are sold through subsidiary dealers or directly to the end customer, revenue is recognized once the related product is shipped to the end customer and installation is substantially complete. Offers such as rebates and discounts are recorded as reductions to net sales. Unearned revenue occurs during the normal course of business due to advance payments from customers for future delivery of products and services.
Shipping and Handling
The company records shipping and handling related expenses under the caption Cost of Sales in the Consolidated Statements of Operations.
The companys comprehensive income (loss) consists of net earnings, foreign currency translation adjustments, pension and post-retirement liability adjustments, and unrealized holding gains (losses) on available-for-sale investments. The components of Accumulated Other Comprehensive Loss in each of the last three fiscal years are as follows.
|(In millions)||Foreign Currency|
(net of tax)
(net of tax)
|Balance, May 28, 2005||$||(4.0||)||$||(60.5||)||$||0.1||$||(64.4||)|
|gain/(loss) in fiscal 2006||1.2||0.3||(0.4||)||1.1|
|Balance, June 3, 2006||(2.8||)||(60.2||)||(0.3||)||(63.3||)|
|Other comprehensive gain in|
|Adjustments to adopt SFAS|
|Balance, June 2, 2007||0.5||(51.9||)||(0.2||)||(51.6||)|
|gain/(loss) in fiscal 2008||4.1||(12.6||)||||(8.5||)|
|Balance May 31, 2008||$||4.6||$||(64.5||)||$||(0.2||)||$||(60.1||)|
(1)See discussion related to the adoption of SFAS 158 below under New Accounting Standards in this footnote
Use of Estimates in the
Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Variable Interest Entities
The company has provided subordinated debt to and/or guarantees on behalf of certain independent contract furniture dealerships. These relationships may constitute variable interests under the provisions of FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46(R)). On May 31, 2008 and June 2, 2007, the company was not considered the primary beneficiary of any such dealer relationships as defined by FIN 46(R) and therefore, no entities were included as Variable Interest Entities (VIEs) as of these dates. Refer to Note 3 for further discussion regarding VIEs.
The risks and rewards associated with our interests in these dealerships are primarily limited to our outstanding loans and guarantee amounts. As of May 31, 2008 and June 2, 2007, our maximum exposure to potential losses related to outstanding loans to these dealerships totaled $3.2 million and $4.0 million, respectively. Information on our exposure related to outstanding loan guarantees provided to such entities is included in Note 19 to the Consolidated Financial Statements.
New Accounting Standards
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting for uncertainty in tax positions. Under FIN 48, the tax effects of a position should be recognized only if it is more-likely-than-not to be sustained based solely on its technical merits as of the reporting date. FIN 48 also requires significant new annual disclosures in the notes to the financial statements. The effect of adjustments at adoption is required to be recorded directly to beginning retaining earnings in the period of adoption and reported as a change in accounting principle. The company adopted the provisions of FIN 48 at the beginning of fiscal 2008. Further information regarding the adoption of FIN 48 is provided in Note 15.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). This new standard establishes a framework for measuring the fair value of assets and liabilities. This framework is intended to provide increased consistency in how fair value determinations are made under various existing accounting standards which permit, or in some cases require, estimates of fair market value. SFAS 157 also expands financial statement disclosure requirements about a companys use of fair value measurements, including the effect of such measures on earnings. The company is required to adopt this new accounting guidance at the beginning of fiscal 2009. In February 2008, the FASB issued FASB Staff Position (FSP) 157-2, Partial Deferral of the Effective Date of Statement 157 (FSP 157-2). FSP 157-2 delays the effective date of SFAS 157 for all nonfinancial assets and liabilities except those items recognized or disclosed at fair value on an annual or more frequently recurring basis beginning in fiscal 2010. While the company is currently evaluating the provisions of SFAS 157 and FSP 157-2, the adoption is not expected to have a material impact on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159 The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 expands the use of fair value measurement by permitting entities to choose to measure at fair value, many financial instruments and certain other items that are not currently required to be measured at fair value. The company is required to adopt SFAS 159 at the beginning of fiscal 2009 and is in the process of evaluating the applicability and potential impact to its consolidated financial statements.
In December 2007, the FASB issued a revised version of SFAS No. 141 Business Combinations (revised 2007) (SFAS 141(R)). The revision is intended to simplify existing guidance, and partially converge reporting under U.S. Generally Accepted Accounting Principles (GAAP) with international accounting rules.
The FASB also issued SFAS No. 160 Noncontrolling Interests in Consolidated Financial Statements-An Amendment of ARB No. 51 (SFAS 160) at the same time it issued SFAS 141(R). SFAS 160 requires all entities to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements, except as required under FIN 46 (required consolidation with respect to Variable Interest Entities). Its intention is to eliminate the diversity in practice regarding the accounting for transactions between an entity and noncontrolling interests.
The company is required to adopt the provisions of both SFAS 141(R) and SFAS 160 simultaneously at the beginning of fiscal 2010. Earlier adoption is prohibited. The company is currently evaluating the provisions of these pronouncements, and the potential impact on its consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161 Disclosures about Derivative Instruments and Hedging Activities an Amendment of SFAS No. 133 (SFAS 161). SFAS 161 requires enhanced disclosures about derivative and hedging activities that are intended to better convey the purpose of derivative use and the related risks being managed. The enhanced disclosures require a tabular presentation of information related to the fair value of derivatives, the recognized gain or loss, and the classification of those amounts within the financial statements. Prospective application of this statement is effective for the company beginning with the third quarter of fiscal 2009; early application is encouraged. SFAS 161 will not affect the companys financial position or results of operations as the new standard pertains only to the disclosure of information.
During the first quarter of fiscal 2006, the company completed the sale of two wholly owned contract furniture dealerships: Workplace Resource based in Cleveland, Ohio, and WB Wood based in New York, New York. The sale of these dealerships corresponds with the companys strategy to continue pursuing opportunities to transition its owned dealerships to independent owners, as it is believed that independent ownership of contract furniture dealers is generally the best model for a strong distribution network. The company ceased consolidation of the dealerships balance sheets and results of operations since the respective dates of sale. In connection with these sale transactions, the company received total consideration of $5.7 million, of which $2.1 million represented cash proceeds, for net assets with a carrying value of $5.4 million. This resulted in a pre-tax gain on sale of $0.3 million, which is reflected as an offset to Selling, general, and administrative expenses in the Consolidated Statements of Operations.
Included in the terms of sale associated with the previous divestiture of a dealership was a success fee provision requiring the buyer to provide the company additional purchase consideration based upon the operating profitability of the dealership. The company has recognized in its Consolidated Statement of Earnings, a pre-tax gain of $0.9 million during the fiscal year ended May 31, 2008. This additional consideration concluded the terms of the sale.
During the fourth quarter of fiscal 2007, Convia, a subsidiary of Herman Miller, Inc. acquired a technology company for $3.5 million in cash. The intellectual property acquired in connection with this transaction is intended to enhance the functionality of Convias product offering.
On February 1, 2008, the company completed its acquisition of the stock of Brandrud Furniture, Inc. (Brandrud), an Auburn, Washington based manufacturer of healthcare furnishings. With annual net sales of approximately $20 million, Brandrud focuses on seating products for patient rooms, patient treatment areas, and public spaces such as lobbies and waiting areas. The initial purchase price related to this transaction was $12.0 million, which included $0.3 million of acquired cash. The contractual terms of this acquisition provide for additional purchase consideration from the company in the third fiscal quarter of 2009 contingent upon the achievement of specific performance targets of Brandrud as a wholly-owned subsidiary. The company estimates the additional purchase consideration, if any, would not exceed $9 million. Final purchase accounting on this transaction is pending the determination of additional purchase consideration and is expected to be completed in fiscal 2009.
Assets acquired and liabilities assumed in the acquisition were recorded on the companys Consolidated Balance Sheets based on their estimated fair values as of the date of the acquisition. The results of operations of Brandrud have been included in the companys Consolidated Statements of Operations since the date of the acquisition. The excess of the purchase price over the estimated fair values of the underlying assets acquired and liabilities assumed was allocated to goodwill. Brandrud is included in the Companys North American segment; therefore all of the goodwill recorded in the acquisition has been allocated to that segment. The purchase price allocation is preliminary and a final determination of required purchase accounting adjustments will be made upon finalization of asset valuations. Revisions to the fair values will be recorded by the company as further adjustments to the purchase price allocation.
Subsequent to the end of the end of fiscal 2008, the company completed the sale of a wholly-owned contract furniture dealership in Texas. The effect of this transaction on the companys consolidated financial statements is not material.
The company adopted FIN 46(R) at the end of fiscal year 2004. At that time the company qualified as the primary beneficiary in certain dealer relationships which required the company to include the financial statements of the qualifying VIEs in its Consolidated Financial Statements. Since that time, triggering events occurred which caused the company to cease the consolidation of these VIE financial statements. At May 31, 2008 and June 2, 2007, the company was not considered the primary beneficiary in any of its independent dealer financing relationships.
During the first quarter of fiscal 2006, a qualifying triggering event occurred with a VIE which resulted in reconsideration under FIN 46(R). Based on this reconsideration, it was determined that the company was no longer the primary beneficiary. Accordingly, the company ceased consolidation of the independent dealerships financial statements. This action resulted in a pre-tax loss of $0.1 million which is reflected in Other Expenses (Income) in the Consolidated Statement of Operations in fiscal 2006.
Consolidation of the VIE during the first quarter of fiscal 2006 increased the companys net sales by $6.8 million. Net earnings for the same period were not significantly affected, excluding the loss on ceasing consolidation, as the resulting earnings were primarily attributed to minority interest of $0.7 million.
|(In millions)||May 31,
|Work in process||13.6||14.3|
Inventories are valued at the lower of cost or market and include material, labor, and overhead. The inventories of the majority of domestic manufacturing subsidiaries are valued using the last-in, first-out method (LIFO). The inventories of all other subsidiaries are valued using the first-in, first-out method. Inventories valued using LIFO amounted to $17.2 million and $21.6 million as of May 31, 2008 and June 2, 2007, respectively. If all inventories had been valued using the first-in first-out method, inventories would have been $12.0 million and $12.1 million higher than reported at May 31, 2008 and June 2, 2007, respectively.
|(In millions)||May 31,
|Deferred income taxes||$||17.1||$||10.4|
|(In millions)||May 31,
|Notes receivable, less allowance of $3.2 in 2008|
and $1.9 in 2007
|Prepaid pension benefits||||9.8|
|Other intangibles, net||18.1||9.4|
|Deferred income taxes||11.9||3.2|
|(In millions)||May 31,
|Compensation and employee benefits||$||92.6||$||95.0|
|Pension and post-retirement benefits||1.6|||
|(In millions)||May 31,|
9. Notes Payable
On December 18, 2008, the company entered into an unsecured revolving credit facility that provides for $250 million of borrowings and which expires December 17, 2012. The agreement has an accordion feature enabling the credit facility to be increased by an additional $100 million, subject to certain conditions. Outstanding borrowings under the agreement bear interest at rates based on the prime, Federal Funds, LIBOR, or negotiated rates as outlined in the agreement. Interest is payable periodically throughout the period a borrowing is outstanding. As of May 31, 2008 the only usage against this facility is related to outstanding standby letters of credit totaling approximately $13.1 million. Usage against the previous facility at June 2, 2007 related to outstanding standby letters of credit and totaled $13.1 million.
|(In millions)||May 31,
|Series A senior notes, 5.94%, due January 3, 2015||$||50.0||$|||
|Series B senior notes, 6.42%, due January 3, 2018||150.0|||
|Series C senior notes, 6.52%, due March 5, 2008||||3.0|
|Debt securities, 7.125%, due March 15, 2011||175.0||175.0|
|Fair value of interest rate swap arrangements||0.5||(1.8||)|
|Less: current portion||||(3.0||)|
The company made its final payment of $3.0 million, and retired its related Series C senior notes on March 5, 2008.
On January 3, 2008, the company issued $200 million Series A and Series B senior unsecured notes, each having interest payments that are due semi-annually. The $200 million of proceeds from the notes were used for an accelerated share repurchase (ASR) of the company's common stock. Prior to the ASR, the company repurchased approximately 2.1 million shares. As a result of the ASR, the company retired an additional 5.4 million shares, bringing the full year repurchase count to 7.5 million shares. The ASR will be completed in September 2008, and the company expects to retire approximately 2 million additional shares at that time.
Provisions of the senior notes and the unsecured senior revolving credit facility restrict, without prior consent, the companys borrowings, capital leases, and the sale of certain assets. In addition, the company has agreed to maintain certain financial performance ratios, which are based on earnings before taxes, interest expense, depreciation and amortization. At May 31, 2008 and June 2, 2007, the company was in compliance with all of these restrictions and performance ratios.
Annual maturities of long-term debt for the five fiscal years subsequent to May 31, 2008, are as follows.
The above amounts exclude the recorded fair value of the companys interest rate swap arrangements, which had a combined fair value of positive $0.5 million as of May 31, 2008. Additional information regarding interest rate swaps is provided in Note 17.
11. Operating Leases
The company leases real property and equipment under agreements that expire on various dates. Certain leases contain renewal provisions and generally require the company to pay utilities, insurance, taxes, and other operating expenses. Future minimum rental payments required under operating leases that have non-cancelable lease terms as of May 31, 2008, are as follows.
Total rental expense charged to operations was $25.9 million, $24.8 million, and $25.6 million, in fiscal 2008, 2007, and 2006, respectively. Substantially all such rental expense represented the minimum rental payments under operating leases.
12. Employee Benefit
The company maintains plans that provide retirement benefits for substantially all employees.
Pension Plans and
Post-Retirement Medical and Life Insurance
The principal domestic retirement plan is a defined-benefit plan with benefits determined by a cash balance calculation. Benefits under this plan are based upon an employees years of service and earnings. The company also offers certain employees retirement benefits under other domestic defined benefit plans, one of which covers employees subject to a collective bargaining arrangement. The company provides healthcare and life insurance benefits to employees who retired from service on or before a qualifying date in 1998 and 2008, respectively. As of the qualifying date, the company discontinued offering post-retirement medical and life insurance benefits to future retirees. Benefits to qualifying retirees under this plan are based on the employees years of service and age at the date of retirement.
In addition to the domestic pension and retiree healthcare and life insurance plans, one of the companys wholly owned foreign subsidiaries has a defined-benefit pension plan based upon an average final pay benefit calculation.
The measurement date for the companys principal domestic and international pension plans as well as its post-retirement medical and life insurance plan is the last day of the fiscal year.
The Company adopted the provisions of SFAS No. 158 as of June 2, 2007 which requires recognition of the overfunded or underfunded status of defined benefit plans as an asset or liability. As a result of the adoption, the company recognized in its June 2, 2007 consolidated balance sheet, an additional $78.2 million liability with corresponding changes in accumulated other comprehensive income and deferred taxes of $50.0 million and $28.2 million, respectively. The adoption of SFAS No. 158 did not require a restatement of prior periods
Benefit Obligations and Funded Status
The following table presents, for the fiscal years noted, a summary of the changes in the projected benefit obligation, plan assets, and funded status of the companys domestic and international pension plans and post-retirement plan.
|Change in benefit obligation:|
|Benefit obligation at beginning of year||$||274.5||$||77.9||$||255.9||$||73.4||$||17.3||$||16.1|
|Foreign exchange impact||||(0.1||)||||3.9|||||
|Benefit obligation at end of year||$||267.9||$||88.7||$||274.5||$||77.9||$||13.4||$||17.3|
|Change in plan assets:|
|Fair value of plan assets at beginning||$||284.3||$||72.8||$||252.1||$||54.5||$||||$|||
|Actual return on plan assets||(4.9||)||(4.9||)||44.3||10.7|||||
|Foreign exchange impact||||||||3.3|||||
|Fair value of plan assets at end of year||263.2||70.9||284.3||72.8|||||
|Over (under) funded status at end of year||$||(4.7||)||$||(17.8||)||$||9.8||$||(5.1||)||$||(13.4||)||$||(17.3||)|
The components of the amounts recognized in the Consolidated Balance Sheets are as follows.
|Pension Benefits||Post-Retirement Benefits|
The accumulated benefit obligation for the companys domestic employee benefit plans totaled $264.1 million and $274.5 million as of the end of fiscal years 2008 and 2007, respectively. For its international plans, these amounts totaled $81.5 million and $69.5 million as of the same dates, respectively.
The components of the amounts recognized in accumulated other comprehensive loss before the effect of income taxes are as follows.
|Pension Benefits||Post-Retirement Benefits|
|Unrecognized net actuarial loss|
|Unrecognized prior service cost||(8.9||)||||(11.7||)||||0.3||0.3|
|Unrecognized transition amount||||0.1||||0.1|||||
Components of Net Periodic Benefit
Costs and Other Changes Recognized in Other Comprehensive Income
The following table is a summary of the annual cost of the companys pension and post-retirement plans.
|Net periodic benefit cost
|Expected return on plan assets||(21.7||)||(21.2||)||(21.1||)|||||||
|Net periodic benefit cost||$||6.6||$||6.1||$||3.5||$||1.3||$||1.8||$||1.6|
|Expected return on plan assets||(5.1||)||(4.3||)||(3.4||)|
|Net periodic benefit cost||$||2.1||$||3.2||$||2.4|
|Total net periodic benefit cost||$||8.7||$||9.3||$||5.9||$||1.3||$||1.8||$||1.6|
The net prior service credit and actuarial loss included in accumulated other comprehensive income expected to be recognized in net periodic benefit cost during fiscal 2009 is $(2.0) million ($(1.3) million, net of tax) and $4.5 million ($2.9 million, net of tax), respectively.
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive (Income) Loss
|Prior service cost||$||0.8||$|||
|Net actuarial (gain) loss||10.8||(3.6||)|
|Total recognized in other comprehensive (income)loss||$||8.4||$||(4.0||)|
|Total recognized net pension (income) cost and|
|other comprehensive (income) loss||$||15.0||$||(2.7||)|
|Net actuarial loss||$||14.0|
|Total recognized in other comprehensive loss||$||13.4|
|Total recognized net pension cost and|
|other comprehensive loss||$||15.5|
|Total recognized in other comprehensive (income)loss||$||21.8||$||(4.0||)|
|Total recognized net pension (income) cost and|
|other comprehensive (income) loss||$||30.5||$||(2.7||)|
The weighted-average actuarial assumptions used to determine the benefit obligation amounts as of the end of the fiscal year for the company's pension plans and post-retirement plans are as follows.
|Compensation increase rate||4.50||5.00||4.50||4.50||4.50||4.25|
The weighted-average actuarial assumptions used to determine the net periodic benefit cost are established at the end of the previous fiscal year for the subsequent fiscal years as follows.
|Compensation increase rate||4.50||4.50||4.50||4.25||4.50||4.25|
|Expected return on plan assets||8.50||7.75||8.50||7.75||8.50||8.00|
In calculating post-retirement benefit obligations, a 9.3 percent annual rate of increase in the per capita cost of covered healthcare benefits was assumed for 2008, decreasing gradually to 5.0 percent by 2014 and remaining at that level thereafter. For purposes of calculating post-retirement benefit costs, a 10.0 percent annual rate of increase in the per capita cost of covered healthcare benefits was assumed for 2007, decreasing gradually to 5.0 percent by 2014 and remaining at that level thereafter.
Assumed health care cost-trend rates have a significant effect on the amounts reported for retiree health care costs. A one-percentage-point change in the assumed health care cost-trend rates would have the following effects:
|(In millions)||1 Percent|
|Effect on total fiscal 2008 service and interest cost components||$||||$|||
|Effect on post-retirement benefit obligation at May 31, 2008||$||0.5||$||(0.||5)|
Plan Assets and Investment Strategies
The companys primary domestic and international plan assets consist mainly of listed common stocks, mutual funds, and fixed income obligations. The companys primary objective for invested pension plan assets is to provide for sufficient long-term growth and liquidity to satisfy all of its benefit obligations over time. Accordingly, the company has developed an investment strategy that it believes maximizes the probability of meeting this overall objective. This strategy includes the development of a target investment allocation by asset category in order to provide guidelines for making investment decisions. This target allocation emphasizes the long-term characteristics of individual asset classes as well as the diversification among multiple asset classes. In developing its strategy, the company considered the need to balance the varying risks associated with each asset class with the long-term nature of its benefit obligations. The companys strategy places an emphasis on the philosophy that, over the long-term, equities will outperform fixed income investments. Accordingly, the majority of plan assets are managed within various forms of equity investments.
The company utilizes independent investment managers to assist with investment decisions within the overall guidelines of the strategy.
The asset allocation for the companys primary pension plans at the end of fiscal 2008 and 2007 and the target allocation by asset category are as follows:
Primary Domestic Plan
|Targeted Asset Allocation Percentage||Actual Percentage of Plan Assets at Year end|
|Fixed Income||20 28||25.7||21.7|
Primary International Plan
|Targeted Asset Allocation Percentage||Actual Percentage of Plan Assets at Year end|
|Fixed Income||10 30||26.2||8.8|
(1)Primarily includes cash and equivalents.
The company is currently determining what voluntary pension plan contributions, if any, will be made in fiscal 2009. Actual contributions will be dependent upon investment returns, changes in pension obligations, and other economic and regulatory factors.
In August 2006, the Pension Protection Act of 2006 (the Act) was signed into law. Beginning in 2008, the Act replaces prevailing statutory minimum funding requirements, and will generally require contributions to the Companys U.S. defined benefit pension plans in amounts necessary to fund the cost of currently-accruing benefits, and to fully-fund any unfunded accrued benefits over a period of seven years. In the long term, the new law is not expected to materially change aggregate contributions required to be made to the U.S. pension plans, although such contributions may vary on a year to year basis from what otherwise would have been required. The extent of these variations is not expected to have a material impact on the Companys financial position or cash flows.
The following represents a summary of the benefits expected to be paid by the company in future fiscal years. These expected benefits were estimated based on the same actuarial valuation assumptions used to determine benefit obligations at May 31, 2008.
Profit Sharing and 401(k)
Herman Miller, Inc. has a trusteed profit sharing plan that includes substantially all domestic employees. These employees are eligible to begin participating on their date of hire. The plan provides for discretionary contributions (payable in the companys common stock) of not more than 6.0 percent of employees wages based on the companys financial performance. The cost of the companys profit sharing contributions charged against operations in fiscal 2008, 2007, and 2006, was $11.0 million, $12.2 million, and $13.9 million, respectively.
The company matches 50 percent of employee contributions to their 401(k) accounts up to 6.0 percent of their pay. The cost of the companys matching contributions charged against operations was approximately $6.8 million, $6.6 million, and $6.7 million, in fiscal 2008, 2007, and 2006, respectively.
13. Common Stock and Per
The following table reconciles the numerators and denominators used in the calculations of basic and diluted EPS for each of the last three fiscal years.
|Numerators for both basic and diluted EPS, net|
|Denominators for basic EPS, weighted-average|
|common shares outstanding||59,109,284||64,318,034||67,861,900|
|Potentially dilutive shares resulting from stock|
|Denominator for diluted EPS||59,584,916||65,061,270||68,501,139|
Options to purchase 1,295,762 shares, 710,516 shares, and 369,817 shares of common stock have not been included in the denominator for the computation of diluted earnings per share for the fiscal years ended May 31, 2008, June 2, 2007, and June 3, 2006, respectively, because they were anti-dilutive.
The company utilizes equity-based compensation incentives as a component of its employee and non-employee director and officer compensation philosophy. Currently, these incentives consist principally of stock options, restricted stock, restricted stock units and performance share units. The company also offers a discounted stock purchase plan for its domestic and international employees. The Company issues shares in connection with its share-based compensation plans from authorized, but unissued, shares.
Valuation and Expense
In December 2004, the FASB issued a revision of SFAS No. 123, Share-Based Payment (SFAS 123(R)), which supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). SFAS 123(R) generally requires companies to measure the cost of employee services received in exchange for an award of equity instruments based on their grant-date fair market value and to recognize this cost over the requisite service period. The company adopted SFAS 123(R) as of the beginning of its 2007 fiscal year, using the modified prospective method. Under this method, compensation expense recognized by the company in fiscal 2008 and 2007, included: (a) compensation cost for all stock-based payments granted prior to, but not yet vested as of June 3, 2006, based on the grant-date fair value estimate in accordance with the original provisions of SFAS 123, Accounting for Stock-Based Compensation, and (b) compensation cost for all stock-based payments granted subsequent to June 3, 2006, based on the grant-date fair value estimated in accordance with SFAS 123(R). Results of prior periods have not been restated.
Prior to the adoption of SFAS 123(R), the company accounted for its stock-based compensation plans under the recognition and measurement principles of APB 25 and related Interpretations. Under this method, compensation expense related to stock options was recognized only if the market price of the stock underlying an award on the date of grant exceeded the related exercise price. Expense attributable to other types of stock-based awards, such as restricted stock grants and restricted stock units, was recognized in the companys reported results under APB 25.
Certain of the companys equity-based compensation awards contain provisions that allow for continued vesting into retirement. Prior to adoption of SFAS 123(R), when following the provisions of APB 25, the company recognized compensation expense related to these awards over the vesting period plus any required performance period, without regard to when an employee became eligible for retirement. Under SFAS 123(R), a stock-based award is considered fully vested for expense attribution purposes when the employees retention of the award is no longer contingent on providing subsequent service.
The company classifies pre-tax stock-based compensation expense primarily within Operating Expenses in the Consolidated Statements of Operations. Related expenses charged to Cost of Sales are not material. For the years ended May 31, 2008 and June 2, 2007, pre-tax compensation expense for all types of stock-based programs and the related income tax benefit recognized was $6.2 million and $2.1 million, and $4.9 million and $1.6 million, respectively. As a result of adopting SFAS 123(R), the companys reported pre-tax stock-based compensation expense for the years ended May 31, 2008 and June 2, 2007, was approximately $3.5 million and $3.0 million higher, respectively, than it would have been under APB 25. The incremental stock-based compensation expense effectively reduced basic and diluted earnings per share in fiscal 2008 and 2007, by $0.04 and $0.03 each, respectively.
The following table reconciles reported net earnings and per share information to pro forma net earnings and per share information that would have been reported if the fair value method had been used to account for stock-based employee compensation in fiscal year 2006.
(In millions, except per share data)
|Net earnings, as reported||$||99.2|
|Addback: Total stock-based employee compensation expense|
|included in net earnings, as reported, net of related tax|
|Less: Total stock-based employee compensation expense|
|determined under fair value based method for all awards,|
|net of related tax effects||(3.4||)|
|Pro forma net earnings||$||97.4|
|Earnings per share:|
|Basic, as reported||$||1.46|
|Basic, pro forma||$||1.44|
|Diluted, as reported||$||1.45|
|Diluted, pro forma||$||1.42|
As of May 31, 2008, total pre-tax stock-based compensation cost not yet recognized related to non-vested awards was approximately $7.1 million. The weighted-average period over which this amount is expected to be recognized is 1.68 years.
The company estimated the fair value of employee stock options on the date of grant using the Black-Scholes model. In determining these values, the following weighted-average assumptions were used for the options granted during the fiscal years indicated.
|Risk-free interest rates(1)||3.13-4.82||%||4.33-4.95||%||3.72-4.38||%|
|Expected term of options(2)||1.6-5.5 years||1.7-5.0 years||1.6-5.0 years|
|Weighted-average grant-date fair value of|
|Granted with exercise prices equal to the|
|fair market value of the stock on the|
|date of grant||$||9.55||$||9.38||$|