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EX-21 - MILLER HERMAN INChmi10k052910ex21.htm
EX-32.B - MILLER HERMAN INChmi10k052910ex32b.htm
EX-32.A - MILLER HERMAN INChmi10k052910ex32a.htm
EX-31.A - MILLER HERMAN INChmi10k052910ex31a.htm
EX-23.A - MILLER HERMAN INChmi10k052910ex23a.htm
EX-10.1 - MILLER HERMAN INChmi10k052910ex101.htm
EX-31.B - MILLER HERMAN INChmi10k052910ex31b.htm
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[ 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 29, 2010
Commission File No. 001-15141
Herman Miller, Inc.
(Exact name of registrant as specified in its charter)
 
Michigan
 
       38-0837640        
 
 
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
 
 
 
 
855 East Main Avenue
 
 
 
 
PO Box 302
 
 
 
 
Zeeland, Michigan
 
49464-0302
 
 
(Address of principal
executive offices)
 
(Zip Code)
 
Registrant's 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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes [__]     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 registrant's 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, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ X ]    Accelerated filer [__]  Non-accelerated filer [__]    Smaller reporting company [__]
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 November 28, 2009, was $835,337,496 (based on $15.17 per share which was the closing sale price as reported by NASDAQ).
 
The number of shares outstanding of the registrant's common stock, as of July 23, 2010: Common stock, $.20 par value - 57,060,055 shares outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on October 11, 2010, are incorporated into Part III of this report.

 

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

 

PART I
 
Item 1 BUSINESS
 
General Development of Business
 
The company researches, designs, manufactures, and distributes interior furnishings, for use in various environments including office, healthcare, educational, and residential settings, and provides related services that support organizations and individuals all over the world. The company's products are sold primarily to or through independent contract office furniture dealers. Through research, the company seeks to define and clarify customer needs and problems existing in its markets and to design, through innovation where appropriate and feasible, products, systems, and services as solutions to such problems. Ultimately, the company seeks to enhance the performance of human habitats worldwide, making its customers' lives more productive, rewarding, delightful, and meaningful.
 
Herman Miller, Inc. was incorporated in Michigan in 1905. One of the company's major plants and its corporate offices are located at 855 East Main Avenue, PO Box 302, Zeeland, Michigan, 49464-0302, and its telephone number is (616) 654-3000. Unless otherwise noted or indicated by the context, the term “company” includes Herman Miller, Inc., its predecessors, and majority-owned subsidiaries. Further information relating to principles of consolidation is provided in Note 1 to the Consolidated Financial Statements included in Item 8 of this report.
Financial Information about Segments
 
Information relating to segments is provided in Note 20 to the Consolidated Financial Statements included in Item 8 of this report.
Narrative Description of Business
 
The company's principal business consists of the research, design, manufacture, and distribution of office furniture systems, products, and related services. Most of these systems and products are designed to be used together.
 
The company works for a better world around our customers by designing furnishings and related services that improve the human experience wherever people work, heal, learn and live. The company's ingenuity and design excellence creates award-winning products and services, that makes us 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®, Ethospace®, Resolve®, My Studio Environments™ and Vivo Interiors™). The company also offers a broad array of seating (including Embody®, Aeron®, Mirra®, Setu™, Celle™, Equa®, and Ergon® office chairs), storage (including Meridian®, Tu™ and Teneo® products), wooden casegoods (including Geiger® products), and freestanding furniture products (including , Abak™, Intent™, Sense™ and Envelop®). These, along with innovative business practices and a commitment to responsible leadership, has resulted in the company being recognized as the most admired company in the industry.
 
The company's products are marketed worldwide by its own sales staff, its owned dealer network, independent dealers and retailers, and via the Internet. Salespersons work with dealers, the design and architectural community, and directly with end-users. Independent dealerships concentrate on the sale of Herman Miller products and some complementary product lines of other manufacturers. It is estimated that approximately 70 percent of the company's sales in the fiscal year ended May 29, 2010, were made to or through independent dealers. The remaining sales were made directly to end-users, including federal, state, and local governments, and several major corporations, by the company's own sales staff, its owned dealer network, or independent retailers.
 

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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 company's suppliers.
 
The company's furniture systems, seating, freestanding furniture, storage and casegood products, and related services are used in (1) office/institution environments including offices and related conference, lobby, and lounge areas, and general public areas including transportation terminals; (2) health/science environments including hospitals, clinics, and other healthcare facilities; (3) industrial and educational settings; and (4) residential and other environments.
 
Raw Materials
The company's manufacturing materials are available from a significant number of sources within the United States, Canada, Europe, and Asia. To date, the company has not experienced any difficulties in obtaining its raw materials. The costs of certain direct materials used in the company's manufacturing and assembly operations are sensitive to shifts in commodity market prices. In particular, the costs of steel components, plastics, and particleboard are sensitive to the market prices of commodities such as raw steel, aluminum, crude oil, lumber, and resins. Increases in the market prices for these commodities can have an adverse impact on the company's profitability. Further information regarding the impact of direct material costs on the company's financial results is provided in Management's Discussion and Analysis in Item 7 of this report.
 
Patents, Trademarks, Licenses, Etc.
The company has 176 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®, Nemschoff®, Action Office®, Ethospace®, Aeron®, Mirra®, Eames®, PostureFit®, and Vivo Interiors™. It is estimated that the average remaining life of such patents and trademarks is approximately 6 years and 9 years, respectively.
 
Working Capital Practices
Information concerning the company's inventory levels relative to its sales volume can be found under the Executive Overview section in Item 7 of this report. Beyond this discussion, the company does not believe that it or the industry in general, has any special practices or special conditions affecting working capital items that are significant for understanding the company's business.
 
Customer Base
It is estimated that no single dealer accounted for more than 5 percent of the company's net sales in the fiscal year ended May 29, 2010. It is also estimated that the largest single end-user customer, the U.S. federal government, accounted for $180.3 million or approximately 14 percent of the company's fiscal 2010 net sales. The 10 largest customers accounted for approximately 27 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 29, 2010, the company's backlog of unfilled orders was $243.6 million. At May 30, 2009, the company's backlog totaled $207.8 million. It is expected that substantially all the orders forming the backlog at May 29, 2010, 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

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indicate the level of net sales for a particular succeeding period.
 
Government Contracts
Other than standard provisions contained in contracts with the United States Government, the company does not believe that any significant portion of its business is subject to material renegotiation of profits or termination of contracts or subcontracts at the election of various government entities. The company sells to the U.S. Government both through a GSA Multiple Award Schedule Contract and through competitive bids. The GSA Multiple Award Schedule Contract pricing is principally based upon the company's commercial price list in effect when the contract is initiated, rather than being determined on a cost-plus-basis. The company is required to receive GSA approval to increase its list prices during the term of the Multiple Award Schedule Contract period.
 
Competition
All aspects of the company's business are highly competitive. The company competes largely on design, product and service quality, speed of delivery, and product pricing. Although the company is one of the largest office furniture manufacturers in the world, it competes with several manufacturers that have greater resources and sales as well as many smaller companies. In the United States, the company's most significant competitors are Haworth, HNI Corporation, Kimball International, Knoll, and Steelcase.
 
Research, Design and Development
The company draws great competitive strength from its research, design and development programs. Accordingly, the company believes that its research and design activities are of significant importance. Through research, the company seeks to define and clarify customer needs and problems and to design, through innovation where feasible and appropriate, innovative products and services as solutions to customer needs and problems. The company uses both internal and independent research and design resources. Exclusive of royalty payments, the company spent approximately $33.2 million, $36.2 million, and $38.8 million, on research and development activities in fiscal 2010, 2009, and 2008, respectively. Generally, royalties are paid to designers of the company's products as the products are sold and are not included in research and development costs since they are variable based on product sales.
 
Environmental Matters
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 company's efforts and accomplishments have been widely recognized. Additionally, the company is pursuing the use of green energy in its manufacturing processes. During the NeoCon show we announced our achievement of fueling 100% of our facilities with renewable energy. This past year we made significant progress toward our goal of having zero impact on the environment by the year 2020. Based on current facts known to management, the company does not believe that existing environmental laws and regulations have had or will have any material effect upon the capital expenditures, earnings, or competitive position of the company. However, there can be no assurance new environmental legislation and technology in this area will not result in or require material capital expenditures or additional costs to our manufacturing process.
 
Human Resources
The company considers its employees to be another of its major competitive strengths. The company stresses individual employee participation and incentives, believing that this emphasis has helped attract and retain a competent and motivated workforce. The company's human resources group provides employee recruitment, education and development, and compensation planning and counseling. There have been no work stoppages or labor disputes in the company's history, and its relations with its employees are considered good. Approximately 6 percent of the company's employees are covered by collective bargaining agreements, most of whom are employees of its Nemschoff and Herman Miller Limited (U.K.) subsidiaries.
 
As of May 29, 2010, the company employed 5,460 full-time and 175 part-time employees, representing a

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7.5 percent increase and a 15.1 percent increase, respectively, compared with May 30, 2009. In addition to its employee work force, the company uses temporary purchased labor to meet uneven demand in its manufacturing operations.
 
Information about International Operations
 
The company's sales in international markets 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, the Middle East, Latin America, and the Asia/Pacific region. In certain foreign markets, the company's products are offered through licensing of foreign manufacturers on a royalty basis.
 
The company's products currently sold in international markets are manufactured by wholly owned subsidiaries in the United States, the United Kingdom, and China. Sales are made through wholly owned subsidiaries or branches in Canada, France, Germany, Italy, Japan, Mexico, Australia, Singapore, China, India, and the Netherlands. The company's products are offered in the Middle East, South America, and Asia through dealers.
 
In several other countries, the company licenses manufacturing and selling rights. Historically, these licensing arrangements have not required a significant investment of funds or personnel by the company, and in the aggregate, have not produced material net earnings for the company.
 
Additional information with respect to operations by geographic area appears in Note 20 of the Consolidated Financial Statements included in Item 8 of this report. Fluctuating exchange rates and factors beyond the control of the company, such as tariff and foreign economic policies, may affect future results of international operations. Refer to Item 7A, Quantitative and Qualitative Disclosures about Market Risk, for further discussion regarding the company's foreign exchange risk.
 
Available Information
 
The company's annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are made available free of charge through the “Investors” section of the company's internet website at www.hermanmiller.com, as soon as practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (SEC). The company's filings with the SEC are also available for the public to read and copy in person at the SEC's 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.
 

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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.
 
Our pension expenses are affected by factors outside our control, including the performance of plan assets, interest rates, actuarial data and experience and changes in laws and regulations.
Our future funding obligations for our U.S. defined benefit pension plans depend upon changes in the level of benefits provided for by the plans, the future performance of assets set aside in trusts for these plans, the level of interest rates used to determine funding levels, actuarial data and experience and any changes in government laws and regulations. In addition, our employee benefit plans hold a significant amount of equity securities. If the market values of these securities decline significantly, our future pension expenses and funding obligations could increase significantly. Decreases in interest rates that are not offset by contributions and asset returns could also increase our obligations under such plans. We may be legally required to make contributions to our U.S. pension plans in the future, and those contributions could be material. In addition, if local legal authorities increase the minimum funding requirements for our pension plan outside the United States, we could be required to contribute more funds, which would negatively affect our cash flow.
 
Sustained downturn in the economy could adversely impact our access to capital.
The global economic and financial market disruption of the past 24 months impacted the broader financial and credit markets, at times reducing the availability of debt and equity capital for the market as a whole. Conditions such as these could re-emerge in the future. Accordingly, our ability to access the capital markets could be restricted at a time when we would like, or need, to access those markets, which could have an impact on our flexibility to react to changing economic and business conditions. The resulting lack of available credit, increased volatility in the financial markets and reduced business activity could materially and adversely affect our business, financial condition, results of operations, our ability to take advantage of market opportunities and our ability to obtain and manage our liquidity. In addition, the cost of debt financing and the proceeds of equity financing may be materially and adversely impacted by these market conditions. The extent of any impact would depend on several factors, including our operating cash flows, the duration of tight credit conditions and volatile equity markets, our credit capacity, the cost of financing, and other general economic and business conditions. Our credit agreements contain performance covenants, such as a limit on the ratio of debt to earnings before interest, taxes, depreciation and amortization, and limits on subsidiary debt and incurrence of liens. Although we believe none of these covenants are presently restrictive to our operations, our ability to meet the financial covenants can be affected by events beyond our control.
 
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

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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.
 
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

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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
•    
Natural disasters
•    
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 operations.
We rely on outside suppliers to provide on-time shipments of the various raw materials and component parts used in our manufacturing and assembly processes. The timeliness of these deliveries is critical to our ability to meet customer demand. 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 increased prices to our customers.
 
Disruptions within our dealer network could adversely affect our business.
Our ability to manage existing relationships within our network of independent dealers is crucial to our ongoing success. Although the loss of any single dealer would not have a material adverse effect on the overall business, our business within a given market could be negatively 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.
 
Increasing competition for highly skilled and talented workers could adversely affect our business.
The successful implementation of our business strategy depends, 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.

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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.
 

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Item 1B UNRESOLVED STAFF COMMENTS — none
 
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 29, 2010 were as follows:
 
Owned Locations
Square
Footage
 
Use
 
 
 
 
Holland, Michigan
917,400
 
 
Manufacturing, Distribution, Warehouse, Design, Office
Spring Lake, Michigan
582,800
 
 
Manufacturing, Warehouse, Office
Spring Lake, Michigan(1)
235,500
 
 
Idle Manufacturing facility
Zeeland, Michigan
750,800
 
 
Manufacturing, Warehouse, Office
Sheboygan, Wisconsin
257,700
 
 
Manufacturing, Warehouse, Office
England, U.K.
85,000
 
 
Manufacturing, Office
 
 
 
 
Leased Locations
 
 
 
 
 
 
 
Zeeland, Michigan(2)
98,100
 
 
Office currently vacant
Atlanta, Georgia
176,700
 
 
Manufacturing, Warehouse, Office
England, U.K.
93,500
 
 
Manufacturing, Warehouse
Ningbo, China
94,700
 
 
Manufacturing, Warehouse, Office
 
(1) The Spring Lake, Michigan, IMT facility, manufacturing, warehouse, and office facility was exited as part of the manufacturing consolidation restructuring action in fiscal 2010.
(2) The Zeeland, Michigan office facility was exited as part of the restructuring action in fiscal year 2009. The lease on this facility expires in December 2010.
 
The company also maintains showrooms or sales offices near many 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 company’s operations, cash flows and financial condition.
 

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ADDITIONAL ITEM: EXECUTIVE OFFICERS OF THE REGISTRANT
 
Certain information relating to Executive Officers of the company is as follows.
Name
Age
 
Year Elected an Executive Officer
Position with the Company
Gregory J. Bylsma
45
 
2009
Executive Vice President, Chief Financial Officer
James E. Christenson
63
 
1989
Senior Vice President, Legal Services, and Secretary
Steven C. Gane
55
 
2009
Senior Vice President, President, Geiger International
Donald D. Goeman
53
 
2005
Executive Vice President, Research, Design & Development
Kenneth L. Goodson, Jr.
58
 
2003
Executive Vice President, Operations
Kathleen D. Koch
52
 
2009
Senior Vice President of Marketing
Andrew J. Lock
56
 
2003
Executive Vice President, President, International
Elizabeth A. Nickels
48
 
2000
Executive Vice President, President, Herman Miller Healthcare
Curtis S. Pullen
50
 
2007
Executive Vice President, President, North American Office and Learning Environments
Jeffrey M. Stutz
39
 
2009
Treasurer and Vice President, Investor Relations
Brian C. Walker
48
 
1996
President and Chief Executive Officer
B. Ben Watson
45
 
2010
Executive Creative Director
 
Except as discussed below, each of the named officers has served the company in an executive capacity for more than five years.
 
Mr. Bylsma joined Herman Miller, Inc. in 2000 as Director of Reporting & Planning for North America prior to being appointed Corporate Controller in 2005.
 
Mr. Gane joined Herman Miller in 2007 as President of Geiger International. Prior to this he worked for Furniture Brands International for 16 years serving mostly as President of HBF.
 
Mr. Goeman joined Herman Miller’s New Product Development group in 1980, and during his 30 years with the company he has held a variety of new product design and development leadership positions.
 
Mrs. Koch joined Herman Miller, Inc. in 2007 as Senior Vice President of Marketing, and prior to this she served as Chief Marketing Officer for Kodak Health Imaging and Kodak Entertainment Imaging for 10 years.
 
Mr. Pullen joined Herman Miller in 1991 and served as Chief Financial Officer from 2007 to 2009, 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. Stutz joined Herman Miller in 2009 as Treasurer and Vice President, Investor Relations. Previously he served as Chief Financial Officer for Izzy Designs Inc., subsequent to holding various positions within Herman Miller finance.
 
Mr. Watson joined Herman Miller in 2010 as Executive Creative Director, and prior to this he served as Managing Director and CEO of Moroso USA. Prior to this Mr. Watson served in creative roles as Global Creative Director of Apparel at Nike, and Global Marketing Director at Vitra.
 
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.

-12-

 

PART II
 
 
Item 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Share Price, Earnings, and Dividends Summary
 
Herman Miller, Inc., common stock is traded on the NASDAQ-Global Select Market System (Symbol: MLHR). As of July 23, 2010, there were approximately 18,200 record holders, including individual participants in security position listings, of the company's common stock.
 
Per Share and Unaudited
 
 
 
Market
Price
High
(at close)
 
Market
Price
Low
(at close)
 
Market
Price
Close
 
Earnings
Per Share-
Diluted (1)
 
Dividends
Declared Per
Share
Year ended May 29, 2010:
 
 
 
 
 
 
 
 
 
First quarter
$
17.20
 
 
$
13.43
 
 
$
16.13
 
 
$
0.14
 
 
$
0.02200
 
Second quarter
19.15
 
 
15.17
 
 
15.17
 
 
0.17
 
 
0.02200
 
Third quarter
18.23
 
 
15.19
 
 
18.20
 
 
0.12
 
 
0.02200
 
Fourth quarter
22.37
 
 
18.06
 
 
19.23
 
 
 
 
0.02200
 
Year
$
22.37
 
 
$
13.43
 
 
$
19.23
 
 
$
0.43
 
 
$
0.08800
 
Year ended May 30, 2009:
 
 
 
 
 
 
 
 
 
First quarter
$
28.54
 
 
$
23.70
 
 
$
28.14
 
 
$
0.60
 
 
$
0.08800
 
Second quarter
30.39
 
 
11.38
 
 
14.71
 
 
0.60
 
 
0.08800
 
Third quarter
15.13
 
 
10.08
 
 
10.08
 
 
(0.10
)
 
0.08800
 
Fourth quarter
15.02
 
 
8.05
 
 
14.23
 
 
0.14
 
 
0.02200
 
Year
$
30.39
 
 
$
8.05
 
 
$
14.23
 
 
$
1.25
 
 
$
0.28600
 
 
(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 2010 and 2009 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 company's future results of operations, financial condition, capital requirements, and other relevant factors.
 
Issuer Purchases of Equity Securities
 
The following is a summary of share repurchase activity during the fourth quarter ended May 29, 2010.
Period
(a) Total Number of
 Shares (or Units) Purchased
 
(b) Average Price Paid
 per Share or Unit
 
(c) Total Number of
Shares (or Units)
Purchased as Part of
 Publicly Announced
 Plans or Programs
 
(d) Maximum Number (or
 Approximate Dollar
 Value) of Shares (or
 Units) that May Yet be
 Purchased Under the
 Plans or Programs (1)
2/28/10-3/27/10
30
 
 
17.87
 
 
30
 
 
$
170,375,922
 
3/28/10-4/24/10
377
 
 
22.00
 
 
377
 
 
$
170,367,628
 
4/25/10-5/29/10
1,327
 
 
19.70
 
 
1,327
 
 
$
170,341,476
 
Total
1,734
 
 
20.17
 
 
1,734
 
 
 
 
(1) Amounts are as of the end of the period indicated

-13-

 

 
The company repurchases shares under a previously announced plan authorized by the Board of Directors on September 28, 2007, which provided 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 2010, 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.
 
Shareholder Return Performance Graph
 
Set forth below is a line graph comparing the yearly percentage change in the cumulative total shareholder return on the Company's common stock with that of the cumulative total return of the Standard & Poor's 500 Stock Index and the NASD Non-Financial Index for the five-year period ended May 29, 2010. The graph assumes an investment of $100 on May 28, 2005 in the company's common stock, the Standard & Poor's 500 Stock Index and the NASD Non-Financial Index, with dividends reinvested.
 
2005
 
2006
 
2007
 
2008
 
2009
 
2010
Herman Miller, Inc.
$
100
 
 
$
102
 
 
$
124
 
 
$
85
 
 
$
50
 
 
$
68
 
S&P 500 Index
$
100
 
 
$
107
 
 
$
128
 
 
$
117
 
 
$
77
 
 
$
91
 
NASD Non-Financial
$
100
 
 
$
105
 
 
$
128
 
 
$
127
 
 
$
71
 
 
$
109
 
 
Information required by this item is also contained in Item 12 of this report.
 

-14-

 

Item 6 SELECTED FINANCIAL DATA
 
Review of Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions, except key ratios and per share data)
2010
 
2009
 
2008
 
2007
 
2006
Operating Results
 
 
 
 
 
 
 
 
 
Net sales
$
1,318.8
 
 
$
1,630.0
 
 
$
2,012.1
 
 
$
1,918.9
 
 
$
1,737.2
 
Gross margin
428.5
 
 
527.7
 
 
698.7
 
 
645.9
 
 
574.8
 
Selling, general, and administrative(8)
334.4
 
 
359.2
 
 
400.9
 
 
395.8
 
 
371.7
 
Design and research
40.5
 
 
45.7
 
 
51.2
 
 
52.0
 
 
45.4
 
Operating earnings
53.6
 
 
122.8
 
 
246.6
 
 
198.1
 
 
157.7
 
Earnings before income taxes
34.8
 
 
98.9
 
 
230.4
 
 
187.0
 
 
147.6
 
Net earnings attributable to controlling interest
28.3
 
 
68.0
 
 
152.3
 
 
129.1
 
 
99.2
 
Cash flow from operating activities
99.1
 
 
91.7
 
 
213.6
 
 
137.7
 
 
150.4
 
Depreciation and amortization
42.6
 
 
41.7
 
 
43.2
 
 
41.2
 
 
41.6
 
Capital expenditures
22.3
 
 
25.3
 
 
40.5
 
 
41.3
 
 
50.8
 
Common stock repurchased plus cash dividends paid
5.7
 
 
19.5
 
 
287.9
 
 
185.6
 
 
175.4
 
 
 
 
 
 
 
 
 
 
 
Key Ratios
 
 
 
 
 
 
 
 
 
Sales growth (decline)
(19.1
)%
 
(19.0
)%
 
4.9
%
 
10.5
%
 
14.6
%
Gross margin (1)
32.5
 
 
32.4
 
 
34.7
 
 
33.7
 
 
33.1
 
Selling, general, and administrative (1) (8)
25.4
 
 
22.0
 
 
19.9
 
 
20.6
 
 
21.4
 
Design and research expense (1)
3.1
 
 
2.8
 
 
2.5
 
 
2.7
 
 
2.6
 
Operating earnings (1)
4.1
 
 
7.5
 
 
12.3
 
 
10.3
 
 
9.1
 
Net earnings attributable to controlling interest growth (decline)
(58.4
)
 
(55.4
)
 
18.0
 
 
30.1
 
 
45.9
 
After-tax return on net sales (4)
2.1
 
 
4.2
 
 
7.6
 
 
6.7
 
 
5.7
 
After-tax return on average assets (5)
3.7
 
 
8.8
 
 
21.0
 
 
19.4
 
 
14.4
 
After-tax return on average equity (6)
64.2
%
 
433.1
%
 
170.5
%
 
87.9
%
 
64.2
%
 
 
 
 
 
 
 
 
 
 
Share and Per Share Data
 
 
 
 
 
 
 
 
 
Earnings per share-diluted
$
0.43
 
 
$
1.25
 
 
$
2.56
 
 
$
1.98
 
 
$
1.45
 
Cash dividends declared per share
0.09
 
 
0.29
 
 
0.35
 
 
0.33
 
 
0.31
 
Book value per share at year end
1.41
 
 
0.15
 
 
0.42
 
 
2.47
 
 
2.10
 
Market price per share at year end
19.23
 
 
14.23
 
 
24.80
 
 
36.53
 
 
30.34
 
Weighted average shares outstanding-diluted
57.5
 
 
54.5
 
 
59.6
 
 
65.1
 
 
68.5
 
 
 
 
 
 
 
 
 
 
 
Financial Condition
 
 
 
 
 
 
 
 
 
Total assets
$
770.6
 
 
$
767.3
 
 
$
783.2
 
 
$
666.2
 
 
$
668.0
 
Working capital (3)
181.7
 
 
243.7
 
 
182.7
 
 
103.2
 
 
93.8
 
Current ratio (2)
1.3
 
 
1.6
 
 
1.6
 
 
1.4
 
 
1.3
 
Interest-bearing debt and related swap agreements
301.2
 
 
377.4
 
 
375.5
 
 
176.2
 
 
178.8
 
Shareholders' equity
80.1
 
 
8.0
 
 
23.4
 
 
155.3
 
 
138.4
 
Total capital (7)
381.3
 
 
385.4
 
 
398.9
 
 
331.5
 
 
317.2
 
 
(1) Shown as a percent of net sales.

-15-

 

(2) Calculated using current assets divided by current liabilities.
(3) Calculated using current assets less non-interest bearing current liabilities.
(4) Calculated as net earnings attributable to controlling interest divided by net sales.
(5) Calculated as net earnings attributable to controlling interest divided by average assets.
(6) Calculated as net earnings attributable to controlling interest divided by average equity.
(7) Calculated as interest-bearing debt plus shareholders' equity.
(8) Selling, general, and administrative expenses include restructuring expenses in years that are applicable.
 
2005
 
2004
 
2003
 
2002
 
2001
 
2000
 
 
 
 
 
 
 
 
 
 
 
$
1,515.6
 
 
$
1,338.3
 
 
$
1,336.5
 
 
$
1,468.7
 
 
$
2,236.2
 
 
$
2,010.2
 
489.8
 
 
415.6
 
 
423.6
 
 
440.3
 
 
755.7
 
 
680.4
 
327.7
 
 
304.1
 
 
319.8
 
 
399.7
 
 
475.4
 
 
404.4
 
40.2
 
 
40.0
 
 
39.1
 
 
38.9
 
 
44.3
 
 
41.3
 
121.9
 
 
61.2
 
 
48.3
 
 
(79.9
)
 
236.0
 
 
234.7
 
112.8
 
 
51.6
 
 
35.8
 
 
(91.0
)
 
225.1
 
 
221.8
 
68.0
 
 
42.3
 
 
23.3
 
 
(56.0
)
 
140.6
 
 
139.7
 
109.3
 
 
82.7
 
 
144.7
 
 
54.6
 
 
211.8
 
 
202.1
 
46.9
 
 
59.3
 
 
69.4
 
 
112.9
 
 
92.6
 
 
77.1
 
34.9
 
 
26.7
 
 
29.0
 
 
52.4
 
 
105.0
 
 
135.7
 
152.0
 
 
72.6
 
 
72.7
 
 
30.3
 
 
105.3
 
 
101.6
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
13.2
%
 
0.1
%
 
(9.0
)%
 
(34.3
)%
 
11.2
%
 
9.9
%
32.3
 
 
31.1
 
 
31.7
 
 
30.0
 
 
33.8
 
 
33.8
 
21.6
 
 
22.7
 
 
23.9
 
 
27.3
 
 
21.3
 
 
20.1
 
2.7
 
 
3.0
 
 
2.9
 
 
2.6
 
 
2.0
 
 
2.1
 
8.0
 
 
4.6
 
 
3.6
 
 
(5.4
)
 
10.6
 
 
11.7
 
60.8
 
 
81.5
 
 
141.6
 
 
(139.8
)
 
0.6
 
 
(1.5
)
4.5
 
 
3.2
 
 
1.7
 
 
(3.8
)
 
6.3
 
 
6.9
 
9.6
 
 
5.7
 
 
3.0
 
 
(6.3
)
 
14.5
 
 
16.5
 
37.3
%
 
21.9
%
 
10.3
%
 
(18.2
)%
 
43.5
%
 
55.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
0.96
 
 
$
0.58
 
 
$
0.31
 
 
$
(0.74
)
 
$
1.81
 
 
$
1.74
 
0.29
 
 
0.18
 
 
0.15
 
 
0.15
 
 
0.15
 
 
0.15
 
2.45
 
 
2.71
 
 
2.62
 
 
3.45
 
 
4.63
 
 
3.76
 
29.80
 
 
24.08
 
 
19.34
 
 
23.46
 
 
26.90
 
 
29.75
 
70.8
 
 
73.1
 
 
74.5
 
 
75.9
 
 
77.6
 
 
80.5
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
707.8
 
 
$
714.7
 
 
$
757.3
 
 
$
788.0
 
 
$
996.5
 
 
$
941.2
 
162.3
 
 
207.8
 
 
189.9
 
 
188.7
 
 
191.6
 
 
99.1
 
1.5
 
 
1.8
 
 
1.7
 
 
1.8
 
 
1.5
 
 
0.9
 
194.0
 
 
207.2
 
 
223.0
 
 
235.1
 
 
259.3
 
 
225.6
 
170.5
 
 
194.6
 
 
191.0
 
 
263.0
 
 
351.5
 
 
294.5
 
364.5
 
 
401.8
 
 
414.0
 
 
498.1
 
 
610.8
 
 
520.1
 
 

-16-

 

Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Management's Discussion and Analysis
 
You should read the issues discussed in Management's Discussion and Analysis in conjunction with the company's Consolidated Financial Statements and the Notes to the Consolidated Financial Statements included in this Form 10-K.
 
Executive Overview
 
At Herman Miller, we work for a better world around you. We do this by designing and developing award-winning furniture and related services and technologies that improve your environment, whether it's an office, hospital, school, home, an entire building, or the world at large. 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 other services extend from workplace solutions to furniture asset management.
 
More than 100 years of innovative business practices and a commitment to social responsibility have established Herman Miller as a recognized global company. In 2009, we were again cited by FORTUNE as both the “Most Admired” in our industry and among the “100 Best Companies to Work For” in America, while Fast Company named Herman Miller among the innovative “Companies to Watch.”
 
Our products are sold internationally through wholly-owned subsidiaries or branches in various countries including the United Kingdom, 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.
 
We are globally positioned in terms of manufacturing operations. In the United States, our manufacturing operations are located in Michigan, Georgia, Iowa and Wisconsin. In Europe, we have a manufacturing presence in the United Kingdom, our largest marketplace outside of the United States. In Asia, we have manufacturing operations in Ningbo, China. We manufacture our products using a system of lean manufacturing techniques collectively referred to as the Herman Miller Performance 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. These factors result in a high rate of inventory turns and typically cause our inventory levels to appear relatively low compared to our 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 Solutions - Includes the business associated with the design, manufacture, and sale of furniture products for office, learning and healthcare environments throughout the United States, Canada, and Mexico.
 

-17-

 

 
Non-North American Furniture Solutions - Includes the business associated with the design, manufacture, and sale of furniture products primarily for work-related settings outside North America.
 
 
Other - Includes our North American residential furniture business as well as other business activities such as Convia, unallocated corporate expenses, and restructuring costs.
 
Core Strengths
We rely on the following core strengths in delivering workplace solutions to our customers.
 
 
Brand - Our brand is recognized by customers as a pioneer in design and sustainability, and as an advocate that supports their needs and interests. Within our industry, Herman Miller is acknowledged as one of the leading brands that inspire architects and designers to create their best commercial design solutions. Leveraging our brand equity across our lines of business to extend our reach to customers and consumers is an important element of our business strategy.
 
 
Problem - Solving Design and Innovation - We 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, engineering, and design staff as well as third party design resources generally compensated on a royalty basis.
 
 
Operational Excellence - We were among the first in our industry to embrace the concepts of lean manufacturing. HMPS provides the foundation for all of our manufacturing operations. We are committed to continuously improving both product quality and production and operational efficiency. We have extended this lean process work to our non-manufacturing processes as well as externally to our manufacturing supply chain and distribution channel. We believe this work holds great promise for further gains in reliability, quality and efficiency.
 
 
Building and Leading Networks - We value relationships in all areas of our business. We consider our networks of innovative designers, owned and independent dealers, and suppliers to be among 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 Licensees - Most of our product sales are made to a network of independently owned and operated contract furniture dealerships doing business in many countries around the world. These dealers purchase our products and distribute them to end customers. We recognize revenue on product sales through this channel once our products are shipped and title passes to the dealer. Many of these dealers also offer furniture-related services, including product installation.
 
 
Owned Contract Furniture Dealers - At May 29, 2010, 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

-18-

 

is to involve local managers in these ownership transitions.
 
 
Direct Customer Sales - We sometimes sell products and services directly to end customers without an intermediary (e.g. sales to the U.S. federal government). In most of these instances, we contract separately with a dealership or third-party installation company to provide sales-related services. We recognize revenue on these sales once products are shipped and installation is substantially complete.
 
 
Independent Retailers - Certain products are sold to end customers through independent retail operations. Revenue is recognized on these sales once products are shipped and title passes to the independent retailer.
 
Challenges Ahead
Like all businesses, we are faced with a host of challenges and risks. We believe our core strengths and values, which provide the foundation for our strategic direction, have us well prepared to respond to the inevitable challenges we will face in the future. While we are confident in our direction, we acknowledge the risks specific to our business and industry. Refer to Item 1A of our Annual Report on Form 10-K for discussion of certain of these risk factors.
 
Future Avenues of Growth
We believe we are well positioned to successfully pursue our mission in spite of the risks and challenges we face. That is, we will design and develop furniture and related services and technologies that reflect sustainable business practices that improve your environment and help create a better world around you. In pursuing our mission, we have identified the following as key avenues for our future growth.
 
 
Primary Markets - Capture additional market share within our primary markets by offering superior solutions to customers who value space as a strategic tool.
 
 
Adjacent Markets - Further apply our core skills in space environments such as healthcare, higher education, and residential.
 
 
Developing Economies - Expand our geographic reach in areas of the world with significant growth potential.
 
 
New Markets - Develop or acquire new products and technologies that serve new markets.
 
Industry Analysis
The Business and Institutional Furniture Manufacturer's Association (BIFMA) is the trade association for the U.S. domestic office furniture industry. We 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 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 in any one period. Finally, BIFMA regularly provides its members with industry forecast information, which we use internally as one of several considerations in our short and long-range planning process.
 

-19-

 

Discussion of Business Conditions
Our fiscal years ended May 29, 2010 and May 30, 2009 each included 52 weeks of operations.
 
Fiscal 2010 was a year marked by economic challenge and strategic achievement. For the second year in a row sales decreased by 19 percent and we were called upon to make tough choices to balance current profitability against future investments. From an economic perspective, the macro drivers of demand in the contract office furniture industry have remained relatively soft with lagging office construction rates and reduced employment levels. However, after finishing the year with two consecutive quarters of year-over-year order growth, it appears that our business is benefiting from some momentum in the broader economy.
 
Apart from the overall economic challenges, we have made great progress this year toward our strategic goals. Despite lower sales relative to last year, we have remained solidly profitable, achieving an operating earnings of 4.1 percent of sales for the full year. We took action to de-leverage our balance sheet in the first quarter through the early retirement of $75 million of long-term debt and then in the third quarter by partially funding our pension obligations. As part of our continuing efforts to reduce fixed operating expenses, our operations team worked diligently toward the implementation of two factory consolidation projects, both of which were successfully concluded during the fourth quarter. Even in this challenging environment we have continued our focus on operational excellence with our manufacturing operations maintaining a reliability score above 99 percent throughout the year. At this year's NeoCon, the contract furniture industry's largest tradeshow, our new healthcare showroom was named the large showroom winner, and, for the fourth time in five years, we received the Office Furniture Dealers Alliance (OFDA) Gold award as the Manufacturer of the Year.
 
During the year, we worked hard to deliver superior products and services to our dealer network. Despite the economic downturn, the development of new products has remained a critical element of our business strategy. At this year's NeoCon we introduced 18 new products. Among the most significant achievements at this year's show was a new healthcare product called CompassTM, which won a Gold award in the healthcare furniture category and the launch of the ThriveTM portfolio of ergonomic products, which includes the technology support category's Silver award winning FloTM monitor arm. In launching ThriveTM we demonstrated that we can and will move quickly to find new areas to serve our traditional customers and dealers. We also hosted an invitation-only event to preview a new chair family we believe will set a new reference point for comfort, beauty and value.
 
During the NeoCon show we announced another milestone for our company: being the first in our industry (and one of the first in the world) to fuel 100% of our facilities with renewable energy. This past year we made significant progress toward our goal of having zero impact on the environment by the year 2020. While we still have progress to make, we believe the finish line is in sight.
 
As in our own business, the severity of the downturn over the past two years has forced our independent dealer network to reduce costs and increase operating efficiencies. As a rule, the financial health of the network remained remarkably strong all year. During the fourth quarter one exception to this rule prompted action on our part. We assumed ownership control of an independent dealer, the Living Edge Group, with locations throughout Australia, in order to protect the continuity of distribution in that region. We have moved aggressively to restructure operations and are pursuing a strategy aimed at returning the dealership to profitability and independent ownership.
 
During our first fiscal quarter of 2010, we completed the acquisition of Nemschoff, a healthcare furniture manufacturer in Sheboygan, Wisconsin. We immediately began the process of integrating its products and processes into our existing healthcare business. This acquisition, along with the fiscal 2008 acquisition of Brandrud, greatly expands our healthcare lineup and our ability to bring complete solutions to the marketplace.
 
During the fourth quarter we acquired U.K.-based Colebrook Bosson Saunders (CBS) a leading designer

-20-

 

and distributor of ergonomic work accessories. This acquisition enhances the scale of our existing accessories business and provides a compelling lineup of solutions to our dealers. The products offered by CBS are now included under the ThriveTM portfolio of ergonomic products and services.
 
As we look forward, with business conditions seemingly improving, there's a growing sense of optimism within the company. Our continued investments in product and business development throughout the downturn have enhanced both the depth and diversity of our market offering, leaving us well equipped to grow in each of our markets. And it's all backed by the innovative spirit of our people and a brand that we believe is second-to-none in our industry.
 
Looking forward, the general economic outlook for our industry in the U.S. is expected to improve in fiscal 2011. For calendar 2011, BIFMA expects positive 9.9 percent and 11.1 percent growth for orders and sales, respectively. This projected improvement is based on a forecasted improvement in the U.S. economy, and assumptions that higher employment will prevail in sectors most likely to consume office furniture and that vacancy rates will decline as unemployment rates fall.
 
Financial Results
The following is a comparison of our annual results of operations and year-over-year percentage changes for the periods indicated.
 
(Dollars In millions)
 
Fiscal 2010
 
% Chg from
2009
 
Fiscal 2009
 
% Chg from
2008
 
Fiscal 2008
Net sales
$
1,318.8
 
 
(19.1
)%
 
$
1,630.0
 
 
(19.0
)%
 
$
2,012.1
 
Cost of sales
890.3
 
 
(19.2
)%
 
1,102.3
 
 
(16.1
)%
 
1,313.4
 
Gross margin
428.5
 
 
(18.8
)%
 
527.7
 
 
(24.5
)%
 
698.7
 
Operating expenses
374.9
 
 
(7.4
)%
 
404.9
 
 
(10.4
)%
 
452.1
 
Operating earnings
53.6
 
 
(56.4
)%
 
122.8
 
 
(50.2
)%
 
246.6
 
Net other expenses
18.8
 
 
(21.3
)%
 
23.9
 
 
47.5
%
 
16.2
 
Earnings before income taxes
34.8
 
 
(64.8
)%
 
98.9
 
 
(57.1
)%
 
230.4
 
Income tax expense
6.5
 
 
(79.0
)%
 
31.0
 
 
(60.4
)%
 
78.2
 
Net loss attributable to noncontrolling interest
 
 
(100.0
)%
 
(0.1
)
 
 
 
(0.1
)
Net earnings attributable to controlling interest
$
28.3
 
 
(58.4
)%
 
$
68.0
 
 
(55.4
)%
 
$
152.3
 

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The following table presents, for the periods indicated, the components of the company's Consolidated Statements of Operations as a percentage of net sales.
 
Fiscal Year Ended
May 29, 2010
 
May 30, 2009
 
May 31, 2008
Net sales
100.0
%
 
100.0
%
 
100.0
%
Cost of sales
67.5
 
 
67.6
 
 
65.3
 
Gross margin
32.5
 
 
32.4
 
 
34.7
 
Selling, general, and administrative expenses
24.1
 
 
20.3
 
 
19.7
 
Restructuring
1.3
 
 
1.7
 
 
0.3
 
Design and research expenses
3.1
 
 
2.8
 
 
2.5
 
Total operating expenses
28.4
 
 
24.8
 
 
22.5
 
Operating earnings
4.1
 
 
7.5
 
 
12.3
 
Net other expenses
1.4
 
 
1.5
 
 
0.8
 
Earnings before income taxes
2.6
 
 
6.1
 
 
11.5
 
Income tax expense
0.5
 
 
1.9
 
 
3.9
 
Net earnings attributable to controlling interest
2.1
 
 
4.2
 
 
7.6
 
 
Net Sales, Orders, and Backlog - Fiscal 2010 Compared to Fiscal 2009
 
For the fiscal year ended May 29, 2010, consolidated net sales declined 19.1 percent to $1,318.8 million from $1,630.0 million for the fiscal year ended May 30, 2009. This year-over-year decline was driven by the global economic environment and was experienced across nearly all operating and geographic units. While the U.S. dollar strengthened against many major currencies during fiscal 2010, it weakened against others, notably the Canadian dollar. The overall impact of foreign currency changes for the fiscal year was to increase net sales by approximately $5 million.
 
Consolidated net trade orders for fiscal 2010 totaled $1,322.4 million compared to $1,564.7 million in fiscal 2009, a decrease of 15.5 percent. Order rates began the year at a steady pace with orders averaging between approximately $25 million and $27 million per week through the first two quarters. These order rates, and other economic inputs, gave a solid signal that the business had hit bottom and was stabilized. Moving into the second half of the year, the third quarter, which historically has the weakest order rate of the year, orders dipped down to an average weekly rate of approximately $22 million per week. Although low, this order rate represented a slight increase in order rates from the prior year. The fourth quarter order rates averaged approximately $28 million per week, which represented our highest order rate in 18 months. The overall impact of foreign currency changes for the fiscal year was to increase net orders by approximately $4 million to $5 million.
 
Our backlog of unfilled orders at the end of fiscal 2010 totaled $243.6 million, a 17.2 percent increase from the $207.8 million backlog at the end of fiscal 2009.
 
BIFMA reported an estimated year-over-year decline in U.S. office furniture shipments of approximately 22.3 percent for the twelve-month period ended May 2010. By comparison, the net sales decline for our domestic U.S. business was approximately 18.8 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.
Net Sales, Orders, and Backlog - Fiscal 2009 Compared to Fiscal 2008
 
For the fiscal year ended May 30, 2009, consolidated net sales declined 19.0 percent to $1,630.0 million from $2,012.1 million in fiscal 2008. This year-over-year decline was driven by the global economic environment and was experienced across nearly all operating and geographic units. The strengthening of the U.S. dollar during fiscal 2009 against most major foreign currencies reduced our top line by approximately

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$30 million.
 
Consolidated net trade orders for fiscal 2009 totaled $1,564.7 million. This is comparable to net trade orders of $2,008.5 million in fiscal 2008, and represents a decrease of 22.1 percent. Starting with the financial market volatility in early fiscal 2009, in part related to the instability in the banking industry, we experienced a sudden and dramatic fall in order rates through most of the third quarter of fiscal 2009. Order rates stabilized through the fourth quarter of fiscal 2009, albeit at much lower level than fiscal 2008. The strong dollar reduced orders by approximately $38 million compared with fiscal 2008.
 
Our backlog of unfilled orders at the end of fiscal 2009 totaled $207.8 million, a 27.4 percent decline from $286.2 million at the end of fiscal 2008.
 
BIFMA reported an estimated year-over-year decline in U.S. office furniture shipments of approximately 13.8 percent for the twelve-month period ended May 2009. By comparison, the net sales decline for our domestic U.S. business was approximately 14.6 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.
 
Discussion of Operating Segments - Fiscal 2010 Compared to Fiscal 2009
 
Net sales within the North American Furniture Solutions (North America) segment were $1,074.5 million in fiscal 2010, a $274.9 million or 20.4 percent decrease from fiscal 2009 net sales of $1,349.4 million. We again experienced a decline throughout our North American business operations in fiscal 2010, except for healthcare which benefited from the acquisition of Nemschoff in the first quarter. Nemschoff sales were $67.6 million during fiscal 2010 or 6.3 percent of net sales. Within this segment, we again experienced better than average sales from education, government and healthcare customers. Operating earnings for the segment in fiscal 2010 were $72.3 million, or 6.7 percent of net sales. This compares to segment earnings of $133.0 million or 9.9 percent in fiscal 2009. With net sales in the segment down 20.4 percent, having operating earnings of 6.7 percent of sales shows the ability to generate strong operating performance despite a significant decline in volume. This performance is largely due to the variable cost business model, which has allowed costs to be shed as net sales declined.
 
Net sales from the non-North American Furniture Solutions (non-North America) segment were $196.3 million in fiscal 2010, a $42.1 million, or 17.7 percent, decrease from fiscal 2009 net sales of $238.4 million. There were regions that experienced year-over-year sales growth, including India, China and Brazil. The areas hardest hit during the year were the Middle East and North Latin America which were down 41 and 37 percent from prior year, respectively. Operating losses within the non-North American segment totaled $1.0 million for the year or negative 0.5 percent of net sales. This compares to operating earnings of $15.1 million or 6.3 percent of net sales in fiscal 2009, a decrease of 680 basis points. The operating loss in fiscal 2010 was significantly affected by an independent dealer in Australia that went into receivership and resulted in bad debt expense of approximately $5 million.
 
Net sales within the “Other” segment category were $48.0 million in fiscal 2010 an increase of $5.8 million, or 13.7 percent, compared to fiscal 2009 net sales of $42.2 million. The increase in net sales is the result of strong sales by our North American Home business. It should be noted that while the majority of corporate costs are allocated to the operating segments, certain costs that are generally considered the result of isolated business decisions are not subject to allocation. Restructuring and asset impairment expenses are some of these costs, and have been allocated entirely to the "Other" category in fiscal 2010. Restructuring and asset impairment expenses totaled $16.7 million in fiscal 2010 and $28.4 million in fiscal 2009 and are discussed further in Note 21 of the Consolidated Financial Statements.
 
Operating losses within the “Other” segment category totaled $17.7 million for the year or negative 36.9 percent of net sales. This compares to a loss of $25.3 million or negative 60.0 percent of net sales in the prior year, an improvement of 2,310 basis points. The significant driver of operating losses in both years

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were restructuring expenses, though it should be noted that in the current year there were also $2.5 million of asset impairment charges related to the Convia business that contributed to the operating loss.
 
The U.S. dollar was up and down against the British pound and the euro during fiscal 2010, and weakened throughout the year against the Canadian dollar. The changes in currency exchange rates from the prior year affected the U.S. dollar value of net sales only in the North American operating segment. The non-North American segment ended the year with essentially no impact from currency on year-over-year net sales. We estimate these changes effectively increased our fiscal 2010 net sales within the North American Furniture Solutions segment by approximately $5 million, driven entirely by the U.S. dollar / Canadian dollar impact, with the Mexican peso having a slight negative impact. 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 $1.0 million in fiscal 2010. The estimated impact on operating earnings of our North American business segment due to currency changes, was an increase of approximately $3.5 million.
 
Discussion of Operating Segments - Fiscal 2009 Compared to Fiscal 2008
 
Net sales within the North American Furniture Solutions segment decreased from $1,636.3 million in fiscal 2008 to $1,349.4 million in fiscal 2009. This represented a year-over-year decrease of $286.9 million or 17.5 percent. We experienced a decline throughout our North American business operations, however, there were customer types within this segment that performed better than the overall average, primarily education, government and healthcare customers. Operating earnings for the segment in fiscal 2009 were $133.0 million, or 9.9 percent of net sales. This compared to segment earnings of $195.9 million or 12.0 percent in fiscal 2008. With a net sales decline of 17.5 percent for the segment, there were both dollar and percent-of-sales decreases to operating earnings in the North American Furniture Solutions segment. This segment's ability to generate strong operating performance despite a significant decline in volume was largely due to our variable business model.
 
Net sales from the non-North American Furniture Solutions segment declined $85.1 million or 26.3 percent from fiscal 2008. The decline was compounded by the strengthening of the U.S. dollar against most foreign currencies. Nearly every region within the segment posted decreases in year-over-year net sales, however, there were pockets of resiliency including the Middle East, South America, and Australia. Total net sales for the segment were $238.4 million, versus $323.5 million in fiscal 2008. The regions which were the hardest hit by the economy were the U.K. which was down 35%, and Japan, down 47%. Operating earnings within the non-North American segment totaled $15.1 million for the year or 6.3 percent of net sales. This compares to $47.3 million or 14.6 percent of net sales in fiscal 2008, a decrease of 830 basis points. Despite the decline in operating income, our low fixed cost model generated positive income with rapid declines in net sales.
 
Net sales within the “Other” segment category were $42.2 million in fiscal 2009 compared to $52.3 million in fiscal 2008. The decrease was the result of net sales declining within the North American Home business, primarily due to the challenges associated with the U.S. economic environment. This overall decrease was somewhat offset by sales to a new retail customer. Operating losses within our “Other” segment category totaled $25.3 million for the year or a negative 60.0 percent of net sales. This compares to operating income of $3.4 million or 6.5 percent of net sales in fiscal 2008, a decrease of 6,650 basis points. Restructuring expense allocated to the "Other " segment was $28.4 million and $5.1 million in fiscal 2009 and fiscal 2008, respectively.
 
The U.S. dollar strengthened against most major currencies throughout fiscal 2009. The changes in currency exchange rates from fiscal 2008 affected the U.S. dollar value of net sales within both primary operating segments. We estimated that these changes effectively decreased our fiscal 2009 net sales within the North American Furniture Solutions segment by approximately $18 million, driven largely by the U.S. dollar, Canadian dollar and the Mexican peso average exchange rate. Currency exchange rate fluctuations within our non-North American Furniture Solutions segment decreased net sales in fiscal 2009 by approximately

-24-

 

$12 million. This was primarily driven by movements in the U.S. dollar / British pound sterling. 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 the non-North American segment increased an estimated $1.5 million in fiscal 2009 due to the aforementioned changes in currency exchange rates relative to the fiscal 2008 level. The estimated impact on operating earnings of our North American business segment was a decrease of approximately $1 million.
 
Gross Margin - Fiscal 2010 Compared to Fiscal 2009
 
Our fiscal 2010 gross margin as a percentage of sales was 32.5 percent which is a increase of 10 basis points from the fiscal 2009 level. Lower direct material costs due to a reduction in commodity prices along with reduced compensation and benefits from a reduced work schedule, offset deeper discounting and loss of leverage from lower volume. Details relative to each component of gross margin follow.
 
Direct material costs as a percentage of sales in the current year decreased 200 basis points. Compared to the prior year, raw material prices were lower in the first half of the year and then gradually increased throughout the second half. The overall impact in the fiscal year was positive.
 
Direct labor costs were higher by 50 basis points as a percentage of sales, though lower in dollars by $13.1 million, from fiscal 2009 levels. This percentage increase was driven by higher benefit expenses and deeper discounting though it was partially offset by increased operational efficiencies.
 
Overhead costs decreased by $25.7 million from fiscal 2009, though as a percentage of sales these costs increased 110 basis points. The percentage increase resulted from lost leverage from lower volume and the impact from deeper discounting in fiscal 2010, though this was partially offset by our ability to realize cost reductions associated with restructuring actions that have taken place over the last 24 months.
 
Freight expenses, as a percentage of sales, were modestly higher by 10 basis points compared to fiscal 2009 levels. In dollars these costs were lower by $10.7 million. While fuel costs did rise throughout the year, the largest contributing factor to the increase as a percentage of sales was the loss of volume which created more less-than-full loads.
 
Gross Margin - Fiscal 2009 Compared to Fiscal 2008
 
Our fiscal 2009 gross margin as a percentage of sales was 32.4 percent, a decline of 230 basis points from the fiscal 2008 level. Higher direct material costs from vendors coupled with significantly lower volumes contributed to this decreased gross margin performance on a year-over-year basis.
 
Direct material costs as a percentage of sales in fiscal 2009 increased 220 basis points. The impact was front end loaded as raw material prices increased dramatically in the first half of the fiscal year, stabilized in the third quarter, and then declined substantially by the end of the year ending at approximately the same level they began.
 
Direct labor costs were higher by 10 basis points as a percentage of sales from fiscal 2008 levels. While the costs were slightly higher, this change in performance reflected a quick response to decreasing net sales and an increased efficiency which was somewhat offset by underlying increases in medical benefits.
 
Overhead costs decreased in fiscal 2009 by $52 million from fiscal 2008. Our ability to react quickly to the sales decline, coupled with the variable nature of our business model, allowed for an improvement of 10 basis points from fiscal 2008. The decrease in costs was a result of the restructuring actions that took place during the year and related primarily to headcount.
 
Freight expenses, as a percentage of sales, were modestly lower compared to 2008 levels. Contributing to the reduction in freight expenses was a significant decrease in diesel fuel prices in the United States, as

-25-

 

we moved through the year.
 
Restructuring - Fiscal 2010
 
Throughout fiscal 2010, we continued to take actions to decrease our cost structure. In the first quarter we announced a plan to consolidate manufacturing operations by closing the Brandrud manufacturing facility in Auburn, Washington and consolidating it with the acquired Nemschoff manufacturing facilities. We had previously announced the decision to consolidate our Integrated Metal Technologies (IMT) subsidiary in Spring Lake, Michigan with other existing manufacturing facilities. Our operations team worked diligently throughout the year to complete both consolidation projects in the fourth quarter. The total expense of these plant consolidations in the fiscal year totaled approximately $9.7 million. We expect to realize incremental annual savings from these consolidation actions of approximately $5 million to $7 million from the current year expense level. These savings will be realized primarily in cost of sales, from reductions in rent expense, depreciation and utilities, as well as savings of approximately $1 million in selling, general, and administrative expenses. We realized approximately $3 million of savings in the current year.
In the fourth quarter we took further action to reduce our salaried workforce, primarily in North America, with the reduction of approximately 70 employees. This action resulted in expenses of approximately $3.2 million and will largely be offset by a 5 percent wage increase for employees impacted by the current year wage reduction action.
Included in the fourth quarter restructuring expenses is an impairment of long-lived assets totaling $2.5 million that were related to our Convia line of business. These assets related to products that we determined had no future revenue stream to the company.
The restructuring accrual balance of $7.0 million is included in, "Accrued liabilities" within the Consolidated Balance Sheet. See Note 21 of the Consolidated Financial Statements for additional information on restructuring.
 
Restructuring - Fiscal 2009
 
In fiscal 2009, we announced a restructuring program designed to align our cost structure with the economic conditions. These actions resulted in the elimination of approximately 1,400 permanent and temporary positions across our operations. These reductions were permanent for our salaried workforce, while our direct labor positions were reduced until business levels return. Those positions that were permanently eliminated represented a variety of functional areas, and the individuals affected were offered one-time termination benefits, including severance and outplacement services.
In addition to the reduction in the workforce we announced plans to shut down our IMT facility in Spring Lake, Michigan. Only the expenses related to the curtailment and special termination benefits of the pension plan were recognized in fiscal 2009.
Pre-tax restructuring expenses for the aforementioned actions totaled $28.4 million in fiscal 2009, which are reflected in the Consolidated Statements of Operations. The related cash payments were $16.8 million in fiscal 2009 and the balance of the restructuring accrual at May 30, 2009 was $9.6 million, which was reflected in the Consolidated Balance Sheet within “Accrued liabilities.”
 
Operating Expense - Fiscal 2010 Compared to Fiscal 2009
 
Operating expenses in fiscal 2010 were $374.9 million, or 28.4 percent of net sales, which compares to $404.9 million, or 24.8 percent of net sales in fiscal 2009. We experienced a year-over-year decrease in operating expense dollars of $30.0 million, and a 360 basis point increase to operating expenses as a percentage of sales. Restructuring and impairment expenses, which included an impairment charge for Convia assets of $2.5 million, were $16.7 million in fiscal 2010, which was a decrease of $11.7 million from the $28.4 million of restructuring expense in fiscal 2009. (Please see the discussion on restructuring expense

-26-

 

above for additional detail.) The operating expenses from Nemschoff during fiscal year 2010 were $18.3 million, which were partially offset by the positive impact on operating expense resulting from reducing the estimated liability related to contingent payments associated with the Nemschoff acquisition of $6.5 million.
 
The year-over-year dollar decline in total expenses of $30.0 million was the result of an $11.7 million decrease in restructuring and impairment expenses and a continued decrease in employee compensation and benefit costs. These decreases in compensation and benefit costs are a result of a combination of current and prior year restructuring as well as the full year effect of the suspension of the 401(k) match and the 10 percent reduction in salary expense that resulted from shutting down facilities on every other Friday.
 
Year-over-year changes in currency exchange rates had a slightly inflationary effect of approximately $0.7 million on operating expenses associated with our international operations.
 
Design and research costs included in total operating expenses for fiscal 2010 was $40.5 million, or 3.1 percent of sales, compared to fiscal 2009 expenses of $45.7 million, or 2.8 percent of sales. This decrease in dollars of $5.2 million was an increase of 30 basis points as a percent of sales and was primarily driven by the timing of various projects being brought to market as well as a continuing evaluation of projects and priorities. We have continued to carefully balance the overall need to control costs with the critical need to continue investing in our strategic priorities. These expenses include royalty payments to the designers of our products totaling $7.3 million and $9.5 million in fiscal years 2010 and 2009, respectively.
 
Operating Expense - Fiscal 2009 Compared to Fiscal 2008
 
Operating expenses in fiscal 2009 were $404.9 million, or 24.8 percent of net sales, which compares to $452.1 million, or 22.5 percent of net sales in fiscal 2008. Although there was a year-over-year decrease of $47.2 million, we experienced a 230 basis point increase to operating expenses as a percentage of sales compared to fiscal 2008. A charge of $28.4 million for restructuring expenses as discussed above is included in fiscal 2009. There was a restructuring charge of $5.1 million in fiscal 2008.
 
The year-over-year dollar decline in expenses, excluding restructuring expense, was $70.5 million or 15.8%. This is primarily due to a decrease in employee compensation and benefit costs as a result of the restructuring actions previously described, as well as a reduction in incentive compensation.
 
Year-over-year changes in currency exchange rates had a deflationary impact on operating expenses associated with our international operations, as measured in U.S. dollars. We estimate these changes decreased our consolidated operating expenses in fiscal 2009 by approximately $6 million relative to fiscal 2008.
 
"Design and research" expenses included in "Total operating expenses" were $45.7 million and $51.2 million in fiscal 2009 and fiscal 2008, respectively. These expenses include royalty payments to the designers of our products.  We consider such royalty payments, which totaled $9.5 million and $12.4 million in fiscal years 2009 and 2008, respectively, to be variable costs of the products being sold. See further discussion on "Design and research" expenses in Note 1 of the Consolidated Financial Statements.
 
Operating Earnings
 
In fiscal 2010 operating earnings were $53.6 million, a 56.4 percent decrease from fiscal 2009 operating earnings of $122.8 million. The fiscal 2009 earnings represented a 50.2 percent decrease from fiscal 2008 operating earnings of $246.6 million. Operating earnings as a percentage of sales for fiscal years 2010, 2009 and 2008 were 4.1 percent, 7.5 percent and 12.3 percent, respectively.
The decrease in operating earnings in fiscal 2010 in both dollars and as a percent of sales is almost entirely due to the $311.2 million, or 19.1 percent, decrease in net sales.
Operating earnings in fiscal 2009 decreased to 7.5 percent of net sales, a 480 basis-point decrease from

-27-

 

the 12.3 percent reported in the prior year. The increase in restructuring expense led to 140 basis points of the decline while the remainder was largely a result of the decline in volume.
 
Other Expenses and Income
 
Net other expenses totaled $18.8 million in fiscal 2010 compared to $23.9 million in fiscal 2009 and $16.2 million in fiscal 2008. The decrease in fiscal 2010 expense compared to fiscal 2009 was primarily the result of decreased interest expense associated with the first quarter repurchase of $75 million of outstanding debt securities.
The increase in expense in fiscal 2009 compared to fiscal 2008 was principally driven by additional interest expense of $6.8 million in fiscal 2009 associated with additional senior subordinated notes. Additionally, net foreign currency transaction losses recorded in fiscal 2009 totaled $1.1 million versus a $0.1 million gain in fiscal 2008.
 
Income Taxes
 
Our effective tax rate was 18.8 percent in fiscal 2010 versus 31.4 percent in fiscal 2009 and 33.9 percent in fiscal 2008. The effective rate in fiscal 2010 was below the statutory rate of 35 percent, primarily due to the release of tax reserves that were no longer needed due to the closure of an IRS audit of the company's tax returns through fiscal 2009 and the domestic U.S. manufacturing tax incentive. The effective rate in fiscal 2009 was below the statutory rate of 35 percent, primarily due to the domestic U.S. manufacturing tax incentive and the realization of foreign tax credits. The effective rate in fiscal 2008 was below the statutory rate primarily due to the domestic U.S. manufacturing tax incentive.
 
We expect our effective tax rate for fiscal 2011 to be between 32 and 34 percent. For further information regarding income taxes, refer to Note 15 of the Consolidated Financial Statements.
 
Net Earnings Attributable to Controlling Interest; Earnings per Share
 
In fiscal 2010 we generated $28.3 million of net earnings attributable to controlling interest. This compares to net earnings attributable to controlling interest in fiscal 2009 and fiscal 2008 of $68.0 million and $152.3 million, respectively. In fiscal 2010 diluted earnings per share were $0.43 while diluted earnings per share in fiscal 2009 were $1.25 and $2.56 in fiscal 2008.
 
Liquidity and Capital Resources
 
The table below presents certain key cash flow and capital highlights for the fiscal years indicated.
 
 
Fiscal Year Ended
(In millions)
2010
 
2009
 
2008
Cash and cash equivalents, end of period
$
134.8
 
 
$
192.9
 
 
$
155.4
 
Short term investments, end of period
$
12.1
 
 
$
11.3
 
 
$
15.7
 
Cash generated from operating activities
$
99.1
 
 
$
91.7
 
 
$
213.6
 
Cash used for investing activities
$
(77.6
)
 
$
(29.5
)
 
$
(51.0
)
Cash used for financing activities
$
(78.9
)
 
$
(16.5
)
 
$
(86.5
)
Pension and post-retirement benefit plan contributions (4)
$
(19.3
)
 
$
(5.3
)
 
$
(5.2
)
Capital expenditures
$
(22.3
)
 
$
(25.3
)
 
$
(40.5
)
Stock repurchased and retired
$
(0.8
)
 
$
(0.3
)
 
$
(266.7
)
Interest-bearing debt, end of period (1) (3)
$
301.2
 
 
$
377.4
 
 
$
375.5
 
Available unsecured credit facility, end of period (2) (3)
$
138.8
 
 
$
236.9
 
 
$
236.9
 
 

-28-

 

(1) Amounts shown include the fair market value of the company's interest rate swap arrangement(s). The net fair value of this/these arrangement(s) was/were $1.2 million at May 29, 2010, $2.4 million at May 30, 2009, and $0.5 million at May 31, 2008.
(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 of the Consolidated Financial Statements.
(3) During the first quarter of fiscal 2010 we renegotiated the unsecured revolving credit facility. 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 Notes 9 and 10 of the Consolidated Financial Statements for additional information.
(4) Amount shown for fiscal 2010 includes a $16.7 million contribution made in the company's common stock.
 
 
Cash Flow — Operating Activities
Cash generated from operating activities in fiscal 2010 totaled $99.1 million compared to $91.7 million generated in the prior year. This represents an increase of $7.4 million compared to fiscal 2009. Changes in working capital balances resulted in a $4.8 million source of cash in the current fiscal year compared to a $62.8 million use of cash in the prior year. Cash from operations also included proceeds of $4.8 million from company owned life insurance policies in fiscal 2010.
 
The source of cash related to working capital balances in fiscal 2010 is primarily driven from a decrease in trade receivables of $9.0 million, a decrease in prepaids of $23.6 million and an increase in trade payables of $13.9 million. These favorable changes were offset by an increased investment in inventory of $7.1 million and a decrease in other accruals. The other accruals decreased primarily due to restructuring payments of $15.5 million during fiscal 2010.
 
The use of cash related to working capital balances in fiscal 2009 is primarily driven from decreased current liabilities of $126.8 million over fiscal 2008. The reduction in liabilities is primarily related to reductions in accounts payable related to inventory, and accruals related to regular and incentive compensation. The use of cash is partially offset by volume related declines in accounts receivables of $53.5 million and inventories of $15.3 million. Accounts receivable declined 28.8% from fiscal 2008, though it should be noted, this decline is not as substantial as the quarterly decline in sales. However, this lag is not reflective of deterioration of the accounts receivable aging, but rather the timing of the sales within the fourth quarter and the customer type. Certain direct customers and geographic customers tend to have a longer pay cycle. A relatively large percentage of the North American accounts receivable increase pertains to our Mexican subsidiary which has the longest cash collection cycle in the North American segment.
 
The source of cash related to working capital balances in fiscal 2008 is primarily driven from increased current liabilities of $28.0 million over fiscal 2007, 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 $5.3 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.
 
Collections of accounts receivable remained strong throughout the year, and we believe our recorded accounts receivable valuation allowances at the end of fiscal 2010 are adequate to cover the risk of potential bad debts. Allowances for non-collectible accounts receivable, as a percent of gross accounts receivable, totaled 3.0 percent, 4.7 percent, and 2.6 percent at the end of fiscal years 2010, 2009, and 2008, respectively.
 
During fiscal 2010 $2.6 million in cash contributions were made to our employee pension and post-retirement benefit plans. Cash contributions during fiscal years 2009 and 2008 made to our employee pension and post-retirement benefit plans totaled $5.3 million and $5.2 million, 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 of the Consolidated Financial Statements.

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Cash Flow — Investing Activities
Capital expenditures totaled $22.3 million, $25.3 million, and $40.5 million in fiscal 2010, 2009 and 2008, respectively. Outstanding commitments for future capital purchases at the end of fiscal 2010 were approximately $3.7 million. We expect capital spending in fiscal 2011 to be between $30 million and $34 million.
 
Included in the fiscal 2010 investing activities, is a net cash outflow of $46.1 million related to our acquisitions of Nemschoff, CBS, and two furniture dealerships during fiscal 2010. Also included within fiscal 2010 investing activities is a note receivable for $6.9 million related to our acquisition of Nemschoff.
 
Included in our fiscal 2009 investing activities, is a net cash outflow of $26.6 million related to the completion of our acquisition of Brandrud, and $2.9 million related to our acquisition of certain elements of Ruskin Industries. In fiscal 2008, our investing activities included a net cash outflow of $11.7 million related to the acquisition of Brandrud. Refer to Note 2 of the Consolidated Financial Statements for further information related to these acquisitions.
 
Our net marketable securities transactions for fiscal 2010 yielded a $0.1 million source of cash. This compares to a $3.4 million source of cash in fiscal 2009
 
In fiscal 2010 we repaid loans held against the value of company owned life insurance policies for $2.9 million. In fiscal 2009, we were advanced $19.3 million of cash against the value of company owned life insurance policies. These activities are reflected as cash payments and proceeds, respectively within the investing activities in the Consolidated Statement of Cash Flows.
 
Cash Flow — Financing Activities 
 
 
Fiscal Year Ended
(In millions, except share and per share data)
2010
 
2009
 
2008
Shares acquired
44,654
 
 
2,138,701
 
 
7,488,430
 
Cost of shares acquired (1)
$
0.8
 
 
$
0.1
 
 
$
266.7
 
Shares issued (2)
3,221,326
 
 
257,765
 
 
276,002
 
Average price per share issued
$
14.9
 
 
$
14.7
 
 
$
23.7
 
Cash dividends paid
$
4.9
 
 
$
19.2
 
 
$
21.2
 
 
(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 total number of shares repurchased under the ASR was 7,538,718 at an average price of $26.61 per share.
(2) Includes 2,041,666 shares issued in connection with the Nemschoff acquisition and 967,000 shares issued as a contribution to the company's pension plans.
 
During the first quarter of fiscal 2010 we renegotiated the syndicated revolving line of credit, reducing our availability from $250 million to $150 million, while giving us additional covenant flexibility. This facility expires in June 2012 and outstanding borrowings bear interest at rates based on the prime rate, federal funds rate, LIBOR, or negotiated rates as outlined in the agreement. Interest is payable periodically throughout the period a borrowing is outstanding. During the first quarter of fiscal 2010, we also completed the repurchase of $75 million of the registered debt securities. In addition to improving our covenant metrics this action also reduces our future interest expense by approximately $1.3 million per quarter.
 
In the fourth quarter of fiscal 2009 we announced a reduction in the cash dividend effective for the first quarter of fiscal 2010 payment. This change reduced the cash dividend to $0.022 per share versus a total quarterly cash dividend of $0.088 per share that was paid through the third quarter of fiscal 2009.

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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 of the Consolidated Financial Statements for more information related to our long-term debt. In fiscal 2008, we also paid off $2.1 million of debt on behalf of Brandrud, our most recent acquisition.
 
As part of our decision to conserve cash we suspended significant share repurchases beginning in fiscal 2009. In fiscal 2008 we repurchased shares totaling $266.7 million. The amount remaining under our share repurchase authorization at the end of fiscal 2010 totaled $170.3 million.
 
Interest-bearing debt at the end of fiscal 2010 of $301.2 million decreased from $377.4 million at the end of fiscal 2009, as compared to $375.5 million at the end of fiscal 2008. The decrease in fiscal 2010 is a result of our early retirement of $75 million of our senior notes.
 
The only usage against our unsecured revolving credit facility at the end of fiscal years 2010 and 2009 represented outstanding standby letters of credit totaling $11.2 million and $13.1 million, respectively. 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 2010.
 
In fiscal 2010, we received $2.5 million related to the issuance of shares in connection with stock-based benefit plans. This compares to receiving $3.4 million and $6.5 million in fiscal 2009 and fiscal 2008, respectively.
 
During fiscal 2010 we did not repatriate any undistributed foreign earnings as compared to $8.0 million in fiscal 2009.
 
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, subject to financing availability in the marketplace.
 

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Contingencies
The company leases a facility in the U.K. under an agreement that expires in June 2011. 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 $1.1 million. As a result, this amount has been recorded as a liability reflected under the caption “Other Liabilities” in the Consolidated Balance Sheets as of May 29, 2010. Based on circumstances existing in fiscal 2009, the amount recorded in the Consolidated Balance Sheets as of May 30, 2009 was $1.0 million.
 
The company has a lease obligation in the U.K. until May 2014 for a facility that it has exited. 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 if it were subleased. As of May 29, 2010 and May 30, 2009 the future cost of this arrangement was estimated to be $1.5 million and $1.6 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 company's opinion that the outcome of such proceedings and litigation currently pending will not materially affect the company's operations, cash flows, and financial condition.
 
Basis of Presentation
The company's fiscal year ends on the Saturday closest to May 31. The fiscal years ended May 29, 2010, May 30, 2009, and May 31, 2008 each included 52 weeks of operations. This is the basis upon which weekly-average data is presented. Certain prior year information has been reclassified to conform to the current year presentation.
 
Contractual Obligations
Contractual obligations associated with our ongoing business and financing activities will result in cash payments in future periods. The following table summarizes the amounts and estimated timing of these future cash payments. Further information regarding debt obligations can be found in Note 10 of the Consolidated Financial Statements. Likewise, further information related to operating leases can be found in Note 11 of the Consolidated Financial Statements.
 
(In millions)
Payments due by fiscal year
 
Total
 
2011
 
2012-2013
 
2014-2015
 
Thereafter
Long-term debt (1)
$
300.0
 
 
$
100.0
 
 
$
 
 
$
50.0
 
 
$
150.0
 
Estimated interest on debt obligations (2)
91.0
 
 
16.8
 
 
25.2
 
 
24.0
 
 
25.0
 
Operating leases
67.1
 
 
15.4
 
 
21.2
 
 
13.5
 
 
17.0
 
Purchase obligations (3)
31.9
 
 
30.9
 
 
1.0
 
 
 
 
 
Pension plan funding (4)
24.4
 
 
14.8
 
 
2.4
 
 
2.3
 
 
4.9
 
Shareholder dividends (5)
1.3
 
 
1.3
 
 
 
 
 
 
 
Other (6)
9.6
 
 
2.2
 
 
1.6
 
 
1.4
 
 
4.4
 
 
 
 
 
 
 
 
 
 
 
Total
$
525.3
 
 
$
181.4
 
 
$
51.4
 
 
$
91.2
 
 
$
201.3
 
 
(1) Amounts indicated do not include the recorded fair value of interest rate swap instruments.
(2) Estimated future interest payments on our outstanding debt obligations are based on interest rates as of May 29, 2010. Actual cash outflows

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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 plan funding commitments are known for a 12-month period for those plans that are funded; unfunded pension and post-retirement plan funding amounts are equal to the estimated benefit payments. As of May 29, 2010, the total accumulated benefit obligation for our domestic and international employee pension benefit plans was $367.6 million.
(5) Represents the recorded dividend payable as of May 29, 2010. 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, and other post-employment benefits.
 
 
Off-Balance Sheet Arrangements
Guarantees
We provide certain guarantees to third parties under various arrangements in the form of product warranties, loan guarantees, standby letters of credit, lease guarantees, performance bonds, and indemnification provisions. These arrangements are accounted for and disclosed in accordance with Accounting Standards Codification (ASC) Topic 460, "Guarantees" as described in Note 19 of 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 29, 2010 and May 30, 2009, we were not considered the primary beneficiary of any such dealer relationships as defined by ASC Topic 810, Consolidation 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 29, 2010 and May 30, 2009, our maximum exposure to potential losses related to outstanding loans to these dealerships totaled $0.4 million and $0.6 million, respectively. Information on our exposure related to any outstanding loan guarantees provided to such entities is included in Note 19 of the Consolidated Financial Statements.
 
Critical Accounting Policies and Estimates
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.
 
Revenue Recognition 
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 thereof is substantially complete.
 
Amounts recorded as net sales generally include any 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

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such estimates, and actual results could differ from our estimates
 
Receivable Allowances
We base our allowances for receivables on known customer exposures, historical credit experience, and the specific identification of other potential problems, including the current 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 $4.4 million and $7.3 million at May 29, 2010 and May 30, 2009, respectively. As a percentage of gross accounts receivable, these allowances totaled 3.0 percent and 4.7 percent, respectively. The year-over-year decrease in the allowance percentage is primarily due to the stabilization of economic conditions and continued financial health of our customers.
 
Goodwill and Indefinite-lived Intangibles
The carrying value of goodwill and indefinite-lived intangible assets as of May 29, 2010 and May 30, 2009, were $132.6 million and $72.7 million, respectively. The increase in these balances is primarily the result of the first quarter acquisition of Nemschoff and the fourth quarter acquisition of CBS. See Note 2 of the Consolidated Financial Statements for further detail on acquisitions. We account for our goodwill and indefinite-lived assets in accordance with the ASC Topic 350, Intangibles-Goodwill and Other. Under this accounting guidance, we are required to perform an annual test on our goodwill and indefinite-lived intangible assets to determine if the asset values are impaired.
 
Our impairment-testing model is based partly on the present value of projected cash flows and the resulting residual value as well as a market-based approach that considers recent market capitalization values of companies who participate in the contract office furniture industry. In completing the test under this approach, we assume that one of the drivers of the value of a business today is 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.
 
We completed the required annual impairment tests in the fourth quarter of fiscal 2010 and concluded that our net goodwill asset values and indefinite-lived assets were not impaired. For goodwill, 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 discount rates, though the testing performed in fiscal 2010 indicates that even a significant increase in the discount rate would not have changed our conclusion. For indefinite-lived assets a relief of royalty method was utilized, which indicated the assets were not impaired.
 
Long-lived Assets
 
We evaluate other long-lived assets and acquired business units for indicators of impairment when events or circumstances indicate that an impairment 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. During the fourth quarter of fiscal 2010 the company recorded an impairment charge of $2.5 million that was related to our Convia line of business. These assets related to products that we determined had no future revenue stream to the company. the impairment charge was

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comprised of $1.4 million of expense related to an intangible asset and $1.1 million of expense in relation to fixed assets, respectively.
 
Warranty Reserve
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 these reserves.
 
Inventory 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 reserve required to record inventory at lower of cost or market may be adjusted in response to changing conditions.
 
Income Taxes
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 adopted the uncertain tax position provisions within ASC Topic 740, "Income Taxes", during the first quarter of fiscal 2008. As a result of the adoption, the company recorded an increase in liabilities for income tax accruals associated with tax benefits claimed on tax returns but not recognized for financial statements purposes (“unrecognized tax benefits”). See Note 15 of the Consolidated Financial Statements for further information regarding the company's uncertain tax positions.
 
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.
 
Self-Insurance Reserves
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, prescription drugs, 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 Post-Retirement Benefits 
The determination of the obligation and expense for pension and other post-retirement benefits depends

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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 Rate — This 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 matching” technique, 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.
 
 
Interest Crediting Rate — We 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 participant's 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 still appropriate.
 
 
Expected Long-Term Rate of Return  We 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 and do 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 29, 2010, and May 30, 2009, the net actuarial loss associated with our employee pension and post-retirement benefit plans totaled approximately $192.3 million and $197.4 million, respectively. The majority of this unrecognized loss was associated with lower than expected discount rates for fiscal 2010 and lower than expected plan asset returns in fiscal 2009. Changes in the discount rate and return on assets can have a significant effect on the expense or obligations related to our pension plans.  We cannot accurately predict these changes in discount rates or investment returns and, therefore, cannot reasonably estimate whether adjustments to our expense or obligation in subsequent years will be significant. Both the May 29, 2010 pension funded status and 2011 expense are affected by year-end 2010 discount rate and expected return on assets assumptions.  Any change to these assumptions will be specific to the time periods noted and may not be additive, so the impact of changing multiple factors simultaneously cannot be calculated by combining the individual sensitivities shown.  The effect of the indicated increase/(decrease) in discount rates and expected return on assets is shown below:
 

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(In millions)
 
 
 
 
 
 
Assumption
 
1 Percent Change
 
2011 Expense
 
May 29, 2010 Obligation
 
 
 
 
U.S.
 
International
 
U.S.
 
International
Discount rate
 
+/- 1.0
 
$ 1.2 / (1.0)
 
$ 1.3 / (1.6)
 
$ (13.1) / 16.7
 
$ (15.6) / 14.7
Expected return on assets
 
+/- 1.0
 
$(2.4) / 2.4
 
$ (0.6) / 0.5
 
 
 
 
 
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 13 years. As of May 29, 2010, the deferred net actuarial loss (i.e. the portion of the total net actuarial loss not subject to amortization) was approximately $79.0 million.
 
Refer to Note 12 of the Consolidated Financial Statements for more information regarding costs and assumptions used for employee benefit plans.
 
Stock-Based Compensation
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 ASC Topic 718. 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 Volatility — This 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 2010, we utilized an expected volatility of 41 percent.
 
 
Expected Term of Options — This 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 2010.
 
Refer to Note 14 of the Consolidated Financial Statements for further discussion on our stock-based compensation plans.
 
Contingencies
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 of the Consolidated Financial Statements for more information relating to contingencies.

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New Accounting Standards
Refer to Note 1 of the Consolidated Financial Statements for information related to new accounting standards.
 
 

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Forward Looking Statements
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 management's 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.
 

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Item 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company manufactures, markets, and sells its products throughout the world and, as a result, is subject to changing economic conditions, which could reduce the demand for its products.
 
Direct Material Costs
The company is exposed to risks arising from price changes for certain direct materials and assembly components used in its operations. The largest such costs incurred by the company are for steel, plastics, textiles, wood particleboard, and aluminum components. Commodity prices decreased during the first three quarters and moderately increased during the fourth quarter of fiscal 2010. The net impact of price changes during fiscal 2010 was an decrease to our costs of $24 million to $25 million over fiscal 2009.
Commodity prices were volatile during fiscal 2009, resulting in sharp increases in costs for the first half of the year. As the year progressed, prices receded back to approximately the same level that they began the year at. The net impact of price changes during fiscal 2009 was an increase to our costs of $24 million to $26 million. Commodity prices were fairly flat during most of fiscal 2008, resulting in increased costs of $2 million to $4 million, with most of this increase occurring in the fourth quarter.
 
Steel and fuel price fluctuations have a direct impact on our input costs for many products. Throughout fiscal 2010 both factors rose moderately during the year. During fiscal 2009 both factors increased sharply, followed by a steady decline in the second half of the year. During fiscal 2008 the impact of steel price increases was fairly flat due to price contracts with suppliers.
 
The company believes market prices for commodities in the near term may move higher and acknowledges that over time 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.
 
Foreign Exchange Risk 
The company primarily 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 company's completed products are sold in numerous countries around the world. Sales in foreign countries as well as certain expenses related to those sales are transacted in currencies other than the company's reporting currency, the U.S. dollar. Accordingly, production costs and profit margins related to these sales are 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 company's competitive positions within these markets.
 
In the normal course of business, the company enters into contracts denominated in foreign currencies. The principal foreign currencies in which the company conducts its business are the British pound sterling, euro, Canadian dollar, Japanese yen, Mexican peso, and Chinese renminbi. As of May 29, 2010, the company had outstanding, nine forward currency instruments designed to offset either net asset or net liability exposure denominated in non-functional currencies. One forward contract was placed in order to offset 4.1 million euro-denominated net asset exposure and three forward contracts were placed in order to offset 5.6 million U.S. dollar-denominated net asset exposure. Four forward contracts were placed to offset a 14.0 million U.S. dollar-denominated net liability exposure and one forward contract was placed to offset a 1.6 million British pound sterling-denominated net liability exposure.
 
As of May 30, 2009, the company had outstanding, nine forward currency instruments designed to offset either net asset or net liability exposure that is denominated in non-functional currencies. Three forward contracts were placed in order to offset 4.8 million euro-denominated net asset exposure and three forward contracts were placed in order to offset 6.4 million U.S. dollar-denominated net asset exposure. Two forward contracts were placed to offset a 4.0 million U.S. dollar-denominated net liability exposure. One forward contract was placed to offset a 1.6 million British pound sterling-denominated net liability exposure. At the

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end of fiscal 2008, three contracts were placed to offset 4.0 million euro for net asset exposure and two contracts for 6.0 million U.S. dollars were placed to offset net liability exposure. In all three years, the instruments were marked to market at the end of the period, with changes in fair value reflected in net earnings. The fair value of the forward currency instruments was negligible for fiscal 2010. The fair value of the forward currency instruments was $0.1 million for both fiscal years 2009 and 2008, respectively.
 
For fiscal year 2010, a net gain of $0.4 million related to remeasuring all foreign currency transactions into the appropriate functional currency was included in net earnings. For fiscal year 2009, a net loss of $1.1 million impacted net earnings. For fiscal year 2008, a net gain of $0.1 million impacted net earnings. Additionally, the cumulative effect of translating the balance sheet and income statement accounts from the functional currency into the United States dollar increased the accumulated comprehensive loss component of total shareholders' equity by $2.9 million and $14.0 million as of the end of fiscal 2010 and fiscal 2009, respectively. Conversely, the effect reduced the accumulated comprehensive loss component of total shareholders equity by $4.1 million for fiscal 2008.
 
Interest Rate Risk
The company maintains fixed-rate debt for which changes in interest rates generally affect fair market value but not earnings or cash flows. As of the end of fiscal years 2010, 2009, and 2008 the company held one interest rate swap agreement that effectively converts $50.0 million of fixed-rate debt securities to a variable rate. This debt is subject to changes in interest rates, which, if significant, could have a material impact on the company's 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 and net asset amount of the effective interest rate swap instruments was $1.2 million, $2.4 million, and $0.5 million at May 29, 2010, May 30, 2009, and May 31, 2008, respectively. The impact of these swap instruments on total interest expense was a reduction to interest expense of $1.9 million in fiscal 2010, $1.2 million in fiscal 2009, and $0.4 million in fiscal 2008. All cash flows related to the company's interest rate swap instruments are denominated in U.S. dollars. For further information, refer to Notes 16 and 17 of the Consolidated Financial Statements.
 
As of May 29, 2010, the weighted-average interest rate on the company's variable-rate debt was approximately 3.8 percent. Based on the level of variable-rate debt outstanding as of that date, a one percentage-point increase in the weighted-average interest rate would increase the company's annual pre-tax interest expense by approximately $0.5 million.

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Expected cash flows (notional amounts) over the next five years and thereafter related to debt instruments are as follows.
 
(In millions)
2011
 
2012
 
2013
 
2014
 
2015
 
Thereafter
 
Total (1)
Long-Term Debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate
$
100.0
 
 
$
 
 
$
 
 
$
 
 
$
50.0
 
 
$
150.0
 
 
$
300.0
 
Wtd. average interest rate = 6.6% (2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Financial Instrument Related to Debt —
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Rate Swap:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay variable/receive fixed
$
50.0
 
 
$
 
 
$
 
 
$
 
 
$
 
 
$
 
 
$
50.0
 
Pay interest rate = 3.80% (at May 29, 2010)
 
 
 
 
 
 
 
 
 
 
 
 
 
Receive interest rate = 7.125%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Amount does not include the recorded fair value of the swap instrument, which totaled $1.2 million at the end of fiscal 2010.
(2) The estimated weighted average interest rate inclusive of the interest rate swap instrument is 6.0%.
 

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Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
Quarterly Financial Data (Unaudited)
 
Set forth below is a summary of the quarterly operating results on a consolidated basis for the years ended May 29, 2010, May 30, 2009, and May 31, 2008. Refer to Management's 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 Quarter
 
Second Quarter
 
Third Quarter
 
Fourth Quarter
2010
Net sales
$
324.0
 
 
$
343.7
 
 
$
329.6
 
 
$
321.5
 
 
Gross margin
107.5
 
 
110.8
 
 
104.8
 
 
105.4
 
 
Net earnings attributable to controlling interest (1)
8.4
 
 
9.6
 
 
8.3
 
 
2.1
 
 
Earnings per share-basic
0.15
 
 
0.17
 
 
0.15
 
 
0.04
 
 
Earnings per share-diluted
0.14
 
 
0.17
 
 
0.12
 
 
 
 
 
 
 
 
 
 
 
 
2009
Net sales
$
479.1
 
 
$
476.6
 
 
$
354.4
 
 
$
319.9
 
 
Gross margin
162.4
 
 
155.4
 
 
105.9
 
 
104.0
 
 
Net earnings attributable to controlling interest
33.4
 
 
32.6
 
 
(5.2
)
 
7.2
 
 
Earnings (loss) per share-basic (1)
0.60
 
 
0.61
 
 
(0.10
)
 
0.14
 
 
Earnings (loss) per share-diluted (1)
0.60
 
 
0.60
 
 
(0.10
)
 
0.14
 
 
 
 
 
 
 
 
 
 
2008
Net sales
$
491.7
 
 
$
505.9
 
 
$
495.4
 
 
$
519.1
 
 
Gross margin (1)
167.5
 
 
180.1
 
 
170.0
 
 
181.0
 
 
Net earnings attributable to controlling interest
33.5
 
 
41.0
 
 
38.3
 
 
39.5
 
 
Earnings per share-basic (1)
0.54
 
 
0.67
 
 
0.66
 
 
0.71
 
 
Earnings per share-diluted (1)
0.54
 
 
0.67
 
 
0.65
 
 
0.71
 
 
(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 basis.
 
 

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Consolidated Statements of Operations
 
 
Fiscal Years Ended
(In millions, except per share data)
May 29, 2010
 
May 30, 2009
 
May 31, 2008
Net sales
$
1,318.8
 
 
$
1,630.0
 
 
$
2,012.1
 
Cost of sales
890.3
 
 
1,102.3
 
 
1,313.4
 
Gross margin
428.5
 
 
527.7
 
 
698.7
 
Operating expenses:
 
 
 
 
 
Selling, general, and administrative
317.7
 
 
330.8
 
 
395.8
 
Restructuring and impairment expenses
16.7
 
 
28.4
 
 
5.1
 
Design and research
40.5
 
 
45.7
 
 
51.2
 
Total operating expenses
374.9
 
 
404.9
 
 
452.1
 
Operating earnings
53.6
 
 
122.8
 
 
246.6
 
Other expenses (income):
 
 
 
 
 
Interest expense
21.7
 
 
25.6
 
 
18.8
 
Interest and other investment income
(4.6
)
 
(2.6
)
 
(3.8
)
Other, net
1.7
 
 
0.9
 
 
1.2
 
Net other expenses
18.8
 
 
23.9
 
 
16.2
 
Earnings before income taxes
34.8
 
 
98.9
 
 
230.4
 
Income tax expense
6.5
 
 
31.0
 
 
78.2
 
Net loss attributable to non-controlling interest
 
 
(0.1
)
 
(0.1
)
Net Earnings Attributable to Controlling Interest
$
28.3
 
 
$
68.0
 
 
$
152.3