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EX-10.I - EXHIBIT 10.I - MILLER HERMAN INCexhibit10i_052816.htm
EX-32.B - EXHIBIT 32.B - MILLER HERMAN INCexhibit32b_052816.htm
EX-32.A - EXHIBIT 32.A - MILLER HERMAN INCexhibit32a_052816.htm
EX-31.B - EXHIBIT 31.B - MILLER HERMAN INCexhibit31b_052816.htm
EX-31.A - EXHIBIT 31.A - MILLER HERMAN INCexhibit31a_052816.htm
EX-23.A - EXHIBIT 23.A - MILLER HERMAN INCexhibit23a_052816.htm
EX-21 - EXHIBIT 21 - MILLER HERMAN INCexhibit21_052816.htm
EX-10.Q - EXHIBIT 10.Q - MILLER HERMAN INCexhibit10q_052816.htm
EX-10.O - EXHIBIT 10.O - MILLER HERMAN INCexhibit10o_052816.htm
EX-10.J - EXHIBIT 10.J - MILLER HERMAN INCexhibit10j_052816.htm
EX-10.G - EXHIBIT 10.G - MILLER HERMAN INCexhibit10g_052816.htm
EX-10.F - EXHIBIT 10.F - MILLER HERMAN INCexhibit10f_052816.htm
EX-10.B - EXHIBIT 10.B - MILLER HERMAN INCexhibit10b_052816.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 28, 2016
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 [ X ]     No [__]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of 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, 2015, was $1,907,720,297 (based on $32.14 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 21, 2016: Common stock, $.20 par value - 60,024,981 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on October 10, 2016, are incorporated into Part III of this report.
































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Herman Miller, Inc. Form 10-K
Table of Contents


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





PART I

Item 1 Business

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

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 14 to the Consolidated Financial Statements included in Item 8 of this report.
Narrative Description of Business
The company's principal business consists of the research, design, manufacture, selling, and distribution of office furniture systems, seating products, other freestanding furniture elements, textiles, home furnishings and related services. Most of these systems and products are designed to be used together.

The company's ingenuity and design excellence create award-winning products and services, which has made us a leader in design and development of furniture, furniture systems, and textiles. This leadership is exemplified by the innovative concepts introduced by the company in its modular systems (including Canvas Office Landscape™®, Locale®, Metaform Portfolio™®, Public Office Landscape™®, Layout Studio®, Action Office®, Ethospace®, Arras®, and Resolve®). The company also offers a broad array of seating (including Embody®, Aeron®, Mirra2™, Setu®, Sayl®, Celle®, Equa®, and Ergon® office chairs), storage (including Meridian® and Tu™® products), wooden casegoods (including Geiger® products), freestanding furniture products (including Abak™®, Intent®, Sense™ and Envelop®), healthcare products (including Palisade™, Compass™®, Nala®, and other Nemschoff® products) the Thrive portfolio of ergonomic solutions, and the textiles of Maharam Fabric Corporation (Maharam).

The company also offers products for residential settings, including Eames®, Eames (lounge chair configuration)®, Eames (management chair configuration)®, Eames Soft Pad™, Nelson™ basic cabinet series, Nelson™ end table, Nelson™ lanterns, Nelson™ marshmallow sofa, Nelson™ miniature chests, Nelson™ platform bench, Nelson™ swag leg group, Nelson™ tray table, Bubble Lamps®, Airia™, Ardea®, Bumper™, Burdick Group™, Everywhere™ tables, Claw™, Caper®, Distil™, Envelope™, Formwork®, Full Round™, H Frame™, I Beam™, Landmark™, Logic Mini™, Logic Power Access Solutions™, Renew™, Rolled Arm™, Scissor™, Sled™, Soft Pad™, Swoop™, Tone™, Twist™, Ward Bennett™ and Wireframe™.

The company's products are marketed worldwide by its own sales staff, independent dealers and retailers, its owned dealer network, via its e-commerce website and through its owned retail studios. Salespeople work with dealers, the architecture and design community, and directly with end-users. Independent dealerships concentrate on the sale of Herman Miller products and some complementary product lines of other manufacturers. It is estimated that approximately 74 percent of the company's sales in the fiscal year ended May 28, 2016, were made to or through independent dealers. The remaining sales were made directly to end-users, including federal, state, and local governments, and several business organizations by the company's own sales staff, its owned dealer network, Design Within Reach ("DWR") retail studios or independent retailers.

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

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

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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, plastic, aluminum components, and particleboard are sensitive to the market prices of commodities such as raw steel, aluminum, crude oil, lumber, and resins. Increases in the market prices for these commodities can have an adverse impact on the company's profitability. Further information regarding the impact of direct material costs on the company's financial results is provided in Management's Discussion and Analysis in Item 7 of this report.

Patents, Trademarks, Licenses, Etc.
The company has active utility patents on various components used in its products and active design patents. Many of the inventions covered by these patents also have been patented in a number of foreign countries. Various trademarks, including the name and stylized “Herman Miller” and the “Herman Miller Circled Symbolic M” trademark are registered in the United States and many foreign countries. The company does not believe that any material part of its business depends on the continued availability of any one or all of its patents or trademarks, or that its business would be materially adversely affected by the loss of any thereof, except fort the following trademarks: Herman Miller®, Herman Miller Circled Symbolic M®, Maharam®, Geiger®, Design Within Reach®, DWR®, Nemschoff®, Action Office®, Ethospace®, Aeron®, Mirra®, Embody®, Setu®, Sayl®, Eames®, PostureFit®, Meridian®, and Canvas Office Landscape®. It is estimated that the average remaining life of the company's patents and trademarks is approximately 5.5 years.

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
The company estimates that no single dealer accounted for more than 5 percent of the company's net sales in the fiscal year ended May 28, 2016. The company estimates that the largest single end-user customer, the U.S. federal government, accounted for $88 million, $97 million, and $102 million of the company's net sales in fiscal 2016, 2015, and 2014, respectively. This represents approximately 4 percent, 5 percent and 5 percent of the company's net sales in fiscal 2016, 2015, and 2014, respectively. The company's 10 largest customers accounted for approximately 18 percent, 20 percent, and 23 percent of net sales in fiscal 2016, 2015, and 2014, respectively.

Backlog of Unfilled Orders
As of May 28, 2016, the company's backlog of unfilled orders was $323.5 million. At May 30, 2015, the company's backlog totaled $322.2 million. The ending backlog of $323.5 million as of the end of fiscal 2016 included a decrease of approximately $14.0 million related to the divestiture of a dealership in Australia. It is expected that substantially all the orders forming the backlog at May 28, 2016, will be filled during the next fiscal year. Many orders received by the company are reflected in the backlog for only a short period while other orders specify delayed shipments and are carried in the backlog for up to one year. Accordingly, the amount of the backlog at any particular time does not necessarily indicate the level of net sales for a particular succeeding period.

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

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

The company also competes in the home furnishings industry, primarily against regional and national independent home furnishings retailers who market high-craft furniture to the interior design community. Similar to our office furniture product offerings, the company competes primarily on design, product and service quality, speed of delivery, and product pricing in this consumer market.

Research, Design, and Development

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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 customers and the problems they are trying to solve. The company designs innovative products and services that address customer needs and solve their problems. The company uses both internal and independent research resources and independent design resources. Exclusive of royalty payments, the company spent approximately $62.4 million, $56.7 million, and $53.9 million on research and development activities in fiscal 2016, 2015, and 2014, respectively. Generally, royalties are paid to designers of the company's products as the products are sold and are included in the Design and research line item within the Consolidated Statements of Comprehensive Income.

Environmental Matters
For over 50 years, respecting the environment has been more than good business practice for us — it is the right thing to do. Our 10-year sustainability strategy — Earthright — begins with three principles: positive transparency, products as living things, and becoming greener together. Our goals are focused around the smart use of resources, eco-inspired design, and becoming community driven. Based on current facts known to management, the company does not believe that existing environmental laws and regulations have had or will have any material effect upon the capital expenditures, earnings, or competitive position of the company. However, there can be no assurance that environmental legislation 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, as well as compensation planning and counseling. Additionally, there have been no work stoppages or labor disputes in the company's history. Approximately 15.6 percent of the company's employees are covered by collective bargaining agreements, most of whom are employees of its Nemschoff, Herman Miller Ningbo, and Herman Miller Dongguan subsidiaries.

As of May 28, 2016, the company had 7,607 employees, representing a 1.3 percent increase as compared with May 30, 2015. The increase in employees was driven principally by an increase in workforce within our West Michigan manufacturing facilities. In addition to its employee workforce, the company uses temporary 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 Abak®, Aeron®, Mirra®, Celle®, Sayl®, Layout Studio®, Arras™, and other seating and storage products (including POSH products). The company conducts business in the following major international markets: Europe, Canada, the Middle East, Latin America, South America, and the Asia/Pacific region.

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

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

Available Information
The company's annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are made available free of charge through the “Investors” section of the company's internet website at www.hermanmiller.com, as soon as practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (SEC). The company's filings with the SEC are also available for the public to read via the SEC's internet website at www.sec.gov.

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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.

Sustained downturn in the economy could adversely impact our access to capital.
The recent disruptions in the global economic and financial markets adversely impacted the broader financial and credit markets, at times reducing the availability of debt and equity capital for the market as a whole. Conditions such as these could re-emerge in the future. Accordingly, our ability to access the capital markets could be restricted at a time when we would like, or need, to access those markets, which could have an 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 currently 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 growth strategy for the business based on a changing and evolving world. Through this strategy we are positioning the company to take advantage of existing markets, explore growth opportunities in new markets with supportive demographics, increase demand by addressing unmet needs, and expanding into areas that yield higher prospects for margins and profitability.

We ultimately aspire to create a lifestyle brand, and we intend to grow in certain targeted ways. First, we will invest in areas that increase our addressable markets across focused customer segments (such as healthcare, education, small and medium business, textiles, and consumer). Second, we will expand into emerging geographic markets that offer growth potential based upon their supportive demographics. Third, we will continue to invest in innovative products, which has been a hallmark of our success for many years. And finally, we will grow through targeted acquisitions.

While we have confidence that our strategic plan reflects opportunities that are appropriate and achievable and that we have anticipated and will manage the associated risks, there is the possibility that the strategy may not deliver the projected results due to inadequate execution, incorrect assumptions, sub-optimal resource allocation, or changing customer requirements.

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 and may involve the assumption of business, operational, or other risks that are new to our business.

Future efforts to expand our business within developing economies, particularly within China and India, may expose us to the effects of political and economic instability. Such instability may impact our ability to compete for business. It may also put the availability and/or value of our capital investments within these regions at risk. These expansion efforts expose us to operating environments with complex, changing, and in some cases, inconsistently-applied legal and regulatory requirements. Developing knowledge and understanding of these requirements poses a significant challenge and failure to remain compliant with them could limit our ability to continue doing business in these locations.

Pursuing our strategic plan in new and adjacent markets, as well as within developing economies, will require us to find effective new channels of distribution. There is no assurance that we can develop or otherwise identify these channels of distribution.

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 differentiate 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.

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

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 are current and future economic and industry conditions that could adversely affect our business, operating results, or financial condition.

Other macroeconomic developments, such as the United Kingdom referendum on European Union membership, recent recessions in Europe, the debt crisis in certain countries in the European Union, and the economic slow down in Asia could negatively affect the company's ability to conduct business in those geographies. The current political and economic uncertainty in the United Kingdom surrounding European Union membership and ongoing debt pressures in certain European countries could cause the value of the British Pound and/or the Euro to deteriorate, reducing the purchasing power of customers in these regions and potentially undermining the financial health of the company's suppliers and customers in other parts of the world. Financial difficulties experienced by the company's suppliers and customers, including distributors, could result in product delays and inventory issues; risks to accounts receivable could result in delays in collection and greater bad debt expense.

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 and India. 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, Hong Kong, and India. In certain other regions of the world, our products are offered primarily through independent dealerships.

Doing business internationally exposes us to certain risks, many of which are beyond our control and could potentially impact our ability to design, develop, manufacture, or sell products in certain countries. These factors could include, but would not necessarily be limited to:
Political, social, and economic conditions
Legal and regulatory requirements
Labor and employment practices
Cultural practices and norms
Natural disasters
Security and health concerns
Protection of intellectual property
Changes in foreign currency exchange rates

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

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


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

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

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

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, aluminum components, and particleboard are sensitive to the market prices of commodities such as raw steel, aluminum, crude oil, lumber, and resins. Increases in the market prices of these commodities, such as what we began to experience toward the end of fiscal 2016 for steel, may have an adverse impact on our profitability if we are unable to offset them with strategic sourcing, continuous improvement initiatives or increased prices to our customers.

Disruptions within our dealer network could adversely affect our business.
Our ability to manage existing relationships within our network of independent dealers is crucial to our ongoing success. Although the loss of any single dealer would not have a material adverse effect on the overall business, our business within a given market could be negatively 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. Those activities increase our financial exposure.

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

A number of factors that affect our ability to successfully implement our retail studio strategy, including opening new locations and closing existing studios, are beyond our control. These factors may harm our ability to increase the sales and profitability of our retail operations.
Approximately 60% of the sales within our Consumer segment are transacted within our DWR retail studios. Additionally, we believe our retail studios have a direct influence on the volume of business transacted through other channels, including our consumer e-commerce and direct-mail catalog platforms, as many customers utilize these physical spaces to view and experience products prior to placing an order online or through the catalog call center. Our ability to open additional studios or close existing studios successfully will depend upon a number of factors beyond our control, including:


- 8-



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

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. We maintain reserves for product defect-related costs based on estimates and our knowledge of circumstances that indicate the need for such reserves. We cannot, however, be certain that these reserves will be adequate to cover actual product defect-related claims in the future. Any significant increase in the rate of our product defect expenses could have a material adverse effect on operations.

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

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

Item 1B Unresolved Staff Comments

None


- 9-



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 28, 2016 were as follows:

Owned Locations
Square
Footage

 
Use
Zeeland, Michigan
750,800

 
Manufacturing, Warehouse, Office
Spring Lake, Michigan
582,700

 
Manufacturing, Warehouse, Office
Holland, Michigan
357,400

 
Distribution
Holland, Michigan
293,100

 
Manufacturing, Office
Holland, Michigan
238,200

 
Office, Design
Dongguan, China
180,800

 
Manufacturing, Office
Sheboygan, Wisconsin
207,700

 
Manufacturing, Warehouse, Office
Melksham, United Kingdom
170,000

 
Manufacturing, Warehouse, Office
Hildebran, North Carolina
93,000

 
Manufacturing, Office
 
 
 
 
Leased Locations
Square
Footage

 
Use
Hebron, Kentucky
316,800

 
Warehouse
Atlanta, Georgia
176,700

 
Manufacturing, Warehouse, Office
Bangalore, India
104,950

 
Manufacturing, Warehouse
Ningbo, China
94,700

 
Manufacturing, Warehouse, Office
Yaphank, New York
92,000

 
Warehouse, Office
New York City, New York
59,000

 
Office, Retail
Hong Kong, China
54,400

 
Warehouse
Bangalore, India
43,560

 
Warehouse, Distribution
Brooklyn, New York
39,400

 
Warehouse, Retail
Stamford, Connecticut
35,300

 
Office, Retail

As of May 28, 2016, the company leased 29 DWR retail studios that totaled approximately 250,000 square feet of selling space. The company also maintains administrative and sales offices and showrooms in various other locations throughout North America, Europe, Asia/Pacific, and Latin America. The company considers its existing facilities to be in good condition and adequate for its design, production, distribution, and selling requirements.



- 10-



Item 3 Legal Proceedings

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

Additional Item: Executive Officers of the Registrant

Certain information relating to Executive Officers of the company is as follows.
Name
Age
Year Elected an Executive Officer
Position with the Company
Brian C. Walker
54
1996
President and Chief Executive Officer
Andrew J. Lock
62
2003
Executive Vice President, President, International
Donald D. Goeman
59
2005
Executive Vice President, Research, Design & Development
Gregory J. Bylsma
51
2009
Executive Vice President, Chief Operating Officer Herman Miller North America (Work and Learning)
Steven C. Gane
61
2009
Senior Vice President, President, Geiger & Specialty/Consumer
Jeffrey M. Stutz
45
2009
Executive Vice President, Chief Financial Officer
B. Ben Watson
51
2010
Executive Creative Director
Michael F. Ramirez
51
2011
Senior Vice President, People, Places and Administration
Louise McDonald
61
2013
Executive Vice President, President, Healthcare
H. Timothy Lopez
45
2014
Senior Vice President, Legal Services, General Counsel and Secretary
Jeffrey L. Kurburski
50
2014
Vice President, Information Technology
John Edelman
49
2015
Executive Vice President and Chief Executive Officer, Design Within Reach, Inc.
John McPhee
53
2015
Executive Vice President and President, Design Within Reach, Inc.
Kevin Veltman
41
2015
Vice President, Investor Relations and Treasurer
Malisa Bryant
49
2015
Senior Vice President of Sales and Distribution, Herman Miller North America (Work and Learning)

Except as discussed below, each of the named officers has served the company in an executive capacity for more than five years.

Ms. Bryant joined the Company in 2013 as Vice President and General Manager of Focused Market Segments and most recently served as Vice President of North America Sales. Prior to joining the Company, she held several leadership roles within the industry, including Vice President of Customer Support, Vice President and General Manager of Strategic Accounts, and Vice President of Sales for Allsteel, in each case at HNI.

Mr. Edelman joined Herman Miller, Inc. in 2015 subsequent to the company's acquisition of DWR. Prior to joining DWR as President and Chief Executive Office in 2010 he served as President and CEO of Edelman Leather and Sam & Libby, Inc., where he was responsible for its U.S. business.

Mr. McPhee joined Herman Miller, Inc. in 2015 subsequent to the company's acquisition of DWR. Prior to that he served in various roles at DWR including Chief Operating Officer and President. Mr. McPhee previously held senior management positions with Edelman Leather, Candie's, Inc. and Sam & Libby, Inc.

Mr. Veltman joined Herman Miller in 2014 and serves as Vice President - Investor Relations and Treasurer. Previously he worked for BISSELL, Inc, most recently as Vice President – Finance, for 8 years and Ernst & Young, LLP for 10 years.

Mr. Kurburski joined Herman Miller in 1990. He served as Director of IT, Herman Miller Casegoods from 1998 to 2003, Director of IT Infrastructure from 2003 to 2007, and has served in his current capacity of Vice President of Information Technology since 2007.

Mr. Lopez joined Herman Miller in 2012 and serves as Senior Vice President of Legal Services, General Counsel and Secretary. Prior to this he was an Associate General Counsel with A. O. Smith Corporation from 2008 to 2012 and Senior Staff Attorney to Kohler Co. from 2002 to 2008.


- 11-



Ms. McDonald joined Herman Miller in 2013 as President of Healthcare, and prior to this she worked for Welch Allyn for 31 years serving mostly as an Executive Vice President.

There are no family relationships between or among the above-named executive officers. There are no arrangements or understandings between any of the above-named officers pursuant to which any of them was named an officer.

Item 4 Mine Safety Disclosures - Not applicable


- 12-



PART II

Item 5 Market for the Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

Share Price, Earnings, and Dividends Summary
Herman Miller, Inc. common stock is traded on the NASDAQ-Global Select Market System (Symbol: MLHR). As of July 21, 2016, there were approximately 20,000 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

 
Dividends
Declared Per
Share

Year ended May 28, 2016:
 
 
 
 
 
 
 
 
 
First quarter
$
30.50

 
$
26.75

 
$
26.99

 
$
0.56

 
$
0.1475

Second quarter
32.69

 
26.28

 
32.14

 
0.57

 
0.1475

Third quarter
32.11

 
22.92

 
26.29

 
0.46

 
0.1475

Fourth quarter
31.64

 
26.09

 
31.64

 
0.67

 
0.1475

Year
$
32.69

 
$
22.92

 
$
31.64

 
$
2.26

 
$
0.5900

Year ended May 30, 2015:
 
 
 
 
 
 
 
 
 
First quarter
$
32.26

 
$
28.69

 
$
29.72

 
$
0.42

 
$
0.1400

Second quarter
32.12

 
28.44

 
30.39

 
0.46

 
0.1400

Third quarter
31.89

 
27.69

 
30.97

 
0.35

 
0.1400

Fourth quarter
31.20

 
27.12

 
27.70

 
0.39

 
0.1400

Year
$
32.26

 
$
27.12

 
$
27.70

 
$
1.62

 
$
0.5600


Dividends were declared and paid quarterly during fiscal 2016 and 2015 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 28, 2016.
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) 

2/28/16 - 3/26/16
2,513

 
26.29

 
2,513

 
$
137,792,871

3/27/16 - 4/23/16
92,747

 
30.74

 
92,747

 
$
134,941,923

4/24/16 - 5/28/16
85,088

 
30.51

 
85,088

 
$
132,346,007

Total
180,348

 


 
180,348

 
 

(1) Amounts are as of the end of the period indicated


- 13-



The company has a share repurchase 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 2016.

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

Stockholder Return Performance Graph
Set forth below is a line graph comparing the yearly percentage change in the cumulative total stockholder return on the company's common stock with that of the cumulative total return of the Standard & Poor's 500 Stock Index and the NASD Non-Financial Index for the five-year period ended May 28, 2016. The graph assumes an investment of $100 on May 28, 2011 in the company's common stock, the Standard & Poor's 500 Stock Index and the NASD Non-Financial Index, with dividends reinvested.

 
2011
 
2012
 
2013
 
2014
 
2015
 
2016
Herman Miller, Inc.
$
100

 
$
74

 
$
118

 
$
132

 
$
118

 
$
135

S&P 500 Index
$
100

 
$
96

 
$
123

 
$
145

 
$
158

 
$
158

NASD Non-Financial
$
100

 
$
99

 
$
127

 
$
157

 
$
190

 
$
188


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)
2016
 
2015
 
2014
 
2013
 
2012
 
Operating Results
 
 
 
 
 
 
 
 
 
 
Net sales
$
2,264.9

 
$
2,142.2

 
$
1,882.0

 
$
1,774.9

 
$
1,724.1

 
Gross margin
874.2

 
791.4

 
631.0

 
605.2

 
590.6

 
Selling, general, and administrative (8)
585.6

 
556.6

 
590.8

 
430.4

 
400.3

 
Design and research
77.1

 
71.4

 
65.9

 
59.9

 
52.7

 
Operating earnings (loss)
211.5

 
163.4

 
(25.7
)
 
114.9

 
137.6

 
Earnings (loss) before income taxes
196.6

 
145.2

 
(43.4
)
 
97.2

 
119.5

 
Net earnings (loss)
137.5

 
98.1

 
(22.1
)
 
68.2

 
75.2

 
Cash flow from operating activities
210.4

 
167.7

 
90.1

 
136.5

 
90.1

 
Cash flow used in investing activities
(80.8
)
 
(213.6
)
 
(48.2
)
 
(209.7
)
 
(58.4
)
 
Cash flow (used in) provided by financing activities
(106.5
)
 
6.8

 
(22.4
)
 
(16.0
)
 
(1.6
)
 
Depreciation and amortization
53.0

 
49.8

 
42.4

 
37.5

 
37.2

 
Capital expenditures
85.1

 
63.6

 
40.8

 
50.2

 
28.5

 
Common stock repurchased plus cash dividends paid
49.0

 
37.0

 
43.0

 
22.7

 
7.9

 
 
 
 
 
 
 
 
 
 
 
 
Key Ratios
 
 
 
 
 
 
 
 
 
 
Sales growth
5.7
%
 
13.8
%
 
6.0
 %
 
2.9
 %
 
4.5
%
 
Gross margin (1)
38.6

 
36.9

 
33.5

 
34.1

 
34.3

 
Selling, general, and administrative (1) (8)
25.9

 
26.0

 
31.4

 
24.3

 
23.2

 
Design and research (1)
3.4

 
3.3

 
3.5

 
3.4

 
3.1

 
Operating earnings (1)
9.3

 
7.6

 
(1.4
)
 
6.5

 
8.0

 
Net earnings growth (decline)
40.2

 
543.9

 
(132.4
)
 
(9.3
)
 
6.2

 
After-tax return on net sales (4)
6.1

 
4.6

 
(1.2
)
 
3.8

 
4.4

 
After-tax return on average assets (5) (9)
11.3

 
9.0

 
(2.3
)
 
7.6

 
9.0

 
After-tax return on average equity (6) (9)
29.1
%
 
25.0
%
 
(6.5
)%
 
24.7
 %
 
34.4
%
 
 
 
 
 
 
 
 
 
 
 
 
Share and Per Share Data
 
 
 
 
 
 
 
 
 
 
Earnings (loss) per share-diluted
$
2.26

 
$
1.62

 
$
(0.37
)
 
$
1.16

 
$
1.29

 
Cash dividends declared per share
0.59

 
0.56

 
0.53

 
0.43

 
0.09

 
Book value per share at year end (9) (10)
8.76

 
7.04

 
6.14

 
5.31

 
4.13

 
Market price per share at year end
31.64

 
27.70

 
31.27

 
28.11

 
17.87

 
Weighted average shares outstanding-diluted
60.5

 
60.1

 
59.0

 
58.8

 
58.5

 
 
 
 
 
 
 
 
 
 
 
 
Financial Condition
 
 
 
 
 
 
 
 
 
 
Total assets (9)
$
1,235.2

 
$
1,192.7

 
$
995.6

 
$
951.2

 
$
843.8

 
Working capital (3) (9)
90.5

 
110.1

 
83.2

 
96.8

 
189.1

 
Current ratio (2) (9)
1.2

 
1.3

 
1.2

 
1.3

 
1.7

 
Interest-bearing debt and related swap agreements (11)
221.9

 
290.0

 
250.0

 
250.0

 
250.0

 
Stockholders' equity (9)
524.7

 
420.3

 
364.3

 
311.7

 
240.5

 
Total capital (7) (9)
746.6

 
710.3

 
614.3

 
561.7

 
490.5

 
(1) Shown as a percent of net sales.
(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 (loss) divided by net sales.
(5) Calculated as net earnings (loss) divided by average assets.
(6) Calculated as net earnings (loss) divided by average equity.
(7) Calculated as interest-bearing debt plus stockholders' equity.
(8) Selling, general, and administrative expenses includes restructuring and impairment expenses in years that are applicable.
(9) Due to an immaterial correction related to the accrual for product warranties, historical figures may have changed. Refer to Note 1 to the Consolidated Financial Statements for additional information regarding this change.
(10) Calculated as total stockholders' equity divided by common shares of stock outstanding.
(11) 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, $0.5 million at May 31, 2008, and $(1.8) million at June 2, 2007.

- 15-




Review of Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions, except key ratios and per share data)
2011
 
2010
 
2009
 
2008
 
2007
Operating Results
 
 
 
 
 
 
 
 
 
Net sales
$
1,649.2

 
$
1,318.8

 
$
1,630.0

 
$
2,012.1

 
$
1,918.9

Gross margin
538.1

 
428.5

 
527.7

 
698.7

 
645.9

Selling, general, and administrative (8)
369.0

 
334.4

 
359.2

 
400.9

 
395.8

Design and research
45.8

 
40.5

 
45.7

 
51.2

 
52.0

Operating earnings
123.3

 
53.6

 
122.8

 
246.6

 
198.1

Earnings before income taxes
102.5

 
34.8

 
98.9

 
230.4

 
187.0

Net earnings
70.8

 
28.3

 
68.0

 
152.3

 
129.1

Cash flow from operating activities
89.0

 
98.7

 
91.7

 
213.6

 
137.7

Cash flow used in investing activities
(31.4
)
 
(77.6
)
 
(29.5
)
 
(51.0
)
 
(37.4
)
Cash flow used in financing activities
(50.2
)
 
(78.9
)
 
(16.5
)
 
(86.5
)
 
(131.5
)
Depreciation and amortization
39.1

 
42.6

 
41.7

 
43.2

 
41.2

Capital expenditures
30.5

 
22.3

 
25.3

 
40.5

 
41.3

Common stock repurchased plus cash dividends paid
6.0

 
5.7

 
19.5

 
287.9

 
185.6

 
 
 
 
 
 
 
 
 
 
Key Ratios
 
 
 
 
 
 
 
 
 
Sales growth (decline)
25.1
%
 
(19.1
)%
 
(19.0
)%
 
4.9
%
 
10.5
%
Gross margin (1)
32.6

 
32.5

 
32.4

 
34.7

 
33.7

Selling, general, and administrative (1) (8)
22.4

 
25.4

 
22.0

 
19.9

 
20.6

Design and research (1)
2.8

 
3.1

 
2.8

 
2.5

 
2.7

Operating earnings (1)
7.5

 
4.1

 
7.5

 
12.3

 
10.3

Net earnings growth (decline)
150.2

 
(58.4
)
 
(55.4
)
 
18.0

 
30.1

After-tax return on net sales (4)
4.3

 
2.1

 
4.2

 
7.6

 
6.7

After-tax return on average assets (5) (9)
8.9

 
3.7

 
8.7

 
20.9

 
19.2

After-tax return on average equity (6) (9)
52.5
%
 
78.1
 %
 
860.8
 %
 
186.4
%
 
92.7
%
 
 
 
 
 
 
 
 
 
 
Share and Per Share Data
 
 
 
 
 
 
 
 
 
Earnings per share-diluted
$
1.06

 
$
0.43

 
$
1.25

 
$
2.56

 
$
1.98

Cash dividends declared per share
0.09

 
0.09

 
0.29

 
0.35

 
0.33

Book value per share at year end (9) (10)
3.42

 
1.27

 

 
0.28

 
2.35

Market price per share at year end
24.56

 
19.23

 
14.23

 
24.80

 
36.53

Weighted average shares outstanding-diluted
57.7

 
57.5

 
54.5

 
59.6

 
65.1

 
 
 
 
 
 
 
 
 
 
Financial Condition
 
 
 
 
 
 
 
 
 
Total assets (9)
$
819.1

 
$
775.3

 
$
772.0

 
$
787.9

 
$
670.9

Working capital (3) (9)
193.4

 
69.2

 
155.2

 
170.2

 
87.7

Current ratio (2) (9)
1.7

 
1.2

 
1.5

 
1.5

 
1.3

Interest-bearing debt and related swap agreements (11)
250.0

 
301.2

 
377.4

 
375.5

 
176.2

Stockholders' equity (9)
197.2

 
72.3

 
0.2

 
15.6

 
147.8

Total capital (7) (9)
447.2

 
373.5

 
377.6

 
391.1

 
324.0




- 16-



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

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

More than 100 years of innovative business practices and a commitment to social responsibility have established Herman Miller as a recognized global company. A past recipient of the Smithsonian Institution's Cooper Hewitt National Design Award, Herman Miller designs can be found in the permanent collections of museums worldwide. Herman Miller maintains its listing in the Dow Jones Sustainability World Index as well as the Human Rights Campaign Foundation’s top rating in its annual Corporate Equality Index. The company trades on the NASDAQ Global Select Market under the symbol MLHR.

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

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

A key element of the company's manufacturing strategy is to limit fixed production costs by sourcing component parts from strategic suppliers. This strategy has allowed the company to increase the variable nature of 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.

The business is comprised of various operating segments as defined by generally accepted accounting principles in the United States (U.S. GAAP). The operating segments are determined on the basis of how the company internally reports and evaluates financial information used to make operating decisions. The company has identified the following reportable segments:

North American Furniture Solutions — Includes the operations associated with the design, manufacture, and sale of furniture products for work-related settings, including office, education, and healthcare environments, throughout the United States and Canada. The North American Furniture Solutions reportable segment is the aggregation of two operating segments. In addition, the company has determined that both operating segments within the North American Furniture Solutions reportable segment represent reporting units.

ELA Furniture Solutions — ELA Furniture Solutions includes the operations associated with the design, manufacture, and sale of furniture products, primarily for work-related settings, in the EMEA, Latin America, and Asia-Pacific geographic regions.

Specialty — Includes the operations associated with design, manufacture, and sale of high-craft furniture products and textiles including Geiger wood products, Maharam textiles, and Herman Miller Collection products.

Consumer — Includes the operations associated with the sale of modern design furnishings and accessories to third party retail distributors, as well as direct to consumer sales through e-commerce, direct mailing catalogs, and DWR studios.

The company also reports a corporate category consisting primarily of unallocated corporate expenses including restructuring, impairment, acquisition-related costs, and other unallocated corporate costs.


- 17-



Core Strengths
The company relies on the following core strengths in delivering workplace solutions to customers.

Portfolio of Leading Brands - Herman Miller is a globally-recognized, authentic brand known for working with some of the most outstanding designers in the world. Within the industries in which the company operates, Herman Miller, DWR, Geiger, Maharam, POSH, Nemschoff and Colbrook Bosson Saunders ("CBS") are acknowledged as leading brands that inspire architects and designers to create their best design solutions. This portfolio has enabled Herman Miller to connect with new audiences, channels, geographies and product categories. Leveraging the company's brand equity across the lines of business is an important element of the company's business strategy.

Problem-Solving Design and Innovation - The company is committed to developing research-based functionality and aesthetically innovative new products and has a history of doing so, in collaboration with a global network of leading independent designers. The company believes its skills and experience in matching problem-solving design with the workplace needs of customers provides the company with a competitive advantage in the marketplace. An important component of the company's business strategy is to actively pursue a program of new product research, design, and development. The company accomplishes this through the use of an internal research and engineering staff that engages with third party design resources generally compensated on a royalty basis.

Operational Excellence - The company was among the first in our industry to embrace the concepts of lean manufacturing. HMPS provides the foundation for all of our manufacturing operations. The company is committed to continuously improving both product quality and production and operational efficiency. The company has extended this lean process work to its non-manufacturing processes as well as externally to our manufacturing supply chain and distribution channel. The company believes these concepts hold significant promise for further gains in reliability, quality and efficiency.

Leading Networks - The company values relationships in all areas of the business. The company considers its network of innovative designers, owned and independent dealers, and suppliers to be among the most important competitive factors and vital to the long-term success of the business.

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

Channels of Distribution
The company's products and services are offered to most of its customers under standard trade credit terms between 30 and 45 days and are sold through the following distribution channels.

Independent and Owned Contract Furniture Dealers - Most of the company's product sales are made to a network of independently owned and operated contract furniture dealerships doing business in many countries around the world. These dealers purchase the company's products and distribute them to end customers. The company recognizes revenue on product sales through this channel once products are shipped and title passes to the dealer. Many of these dealers also offer furniture-related services, including product installation.

At May 28, 2016, the company owned two contract furniture dealerships, one of which has 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. The company recognizes revenue on these sales once products are shipped to the end customer and installation is substantially complete. The company believes independent ownership of contract furniture dealers is generally the best model for a financially strong distribution network. With this in mind, the company's strategy is to continue to pursue opportunities to transition the remaining owned dealerships to independent owners. Where possible, the goal is to involve local managers in these ownership transitions.

Direct Customer Sales - The company also sells products and services directly to end customers without an intermediary (e.g. sales to the U.S. federal government). In most of these instances, the company contracts separately with a dealership or third-party installation company to provide sales-related services. The company recognizes revenue on these sales once products are shipped and installation is substantially complete.

DWR Retail Studios - At the end of fiscal 2016, DWR had 29 retail studios and two outlet locations located in metropolitan areas throughout North America. Revenue on sales from these studios is recognized upon delivery to the end customer.


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E-Commerce - The company sells products through its online stores, in which products are available for sale via the company's website, hermanmiller.com as well as through the DWR online store, dwr.com. These sites complement our existing methods of distribution and extend the company's brand to new customers. The company recognizes revenue on these sales either upon shipment of the product, or for sales through the DWR online store, upon product delivery to the end customer.

DWR Direct-Mail Catalogs - The company’s consumer business unit utilizes a direct-mail catalog program through its DWR subsidiary. A regular schedule of catalog mailings is maintained throughout the fiscal year and these serve as a key driver of sales across each of DWR’s channels, including retail studios and e-commerce websites. Revenue on sales transacted through this catalog program is recognized upon product delivery to the end customer.

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, the company is faced with a host of challenges and risks. The company believes its core strengths and values, which provide the foundation for its strategic direction, have well prepared the company to respond to the inevitable challenges it will face in the future. While the company is confident in its direction, the company acknowledges the risks specific to the business and industry. Refer to Item 1A for discussion of certain of these risk factors. In particular, we continue to experience the negative impact of foreign currency translation and, as of the end of the year, increased pressures from discounting, particularly in the North America and ELA markets.

Avenues of Future Growth
In spite of the risks and challenges it faces, the company believes it is well positioned to successfully pursue its mission of inspiring designs to help people do great things. To find opportunities for growth, Herman Miller is always examining the ways in which the world is changing and evolving. This helps the company better meet the needs of its customers and ultimately, to exceed their expectations. The company has identified three areas of fundamental, social and technological change that are informing and influencing its business strategy.

Globalization & Demographics — Demographic shifts in the global workforce are significantly changing how and where value creation happens. Not only has the millennial generation overtaken the majority representation of the workforce, but economies that once relied on industrial production are increasingly becoming driven by knowledge work.

Inherently Global & Seamlessly Digital — The ubiquity of technology allows people to connect with other people, content, work, businesses, and ideas wherever and whenever they want. This means the way people work is changing, where people work is changing, and how people work with each other is changing.

The Era of Ideas — With the ongoing optimization of industrial production and information sharing, the demand for more innovative business solutions increases. The global focus of work is shifting to the successful generation and deployment of new ideas. As creativity and idea generation drive greater value - people, not process, provide the distinguishing capability. In this shift, workplaces are fundamentally changing from standardized and process-driven designs to diverse places that harness human capability, creativity, and relationships.

Over the past several years, Herman Miller has deployed a strategy to grow the business by shifting its focus in four fundamental areas in response to these changes. Through these shifts the company believes it is positioned to take advantage of existing markets, explore growth opportunities in new markets with supportive demographics, increase demand by addressing unmet needs, and expand into areas that yield higher prospects for margins and profitability. The four fundamental shifts are described below:

From Product Centric to Solutions — The first strategic shift is to move from a product centric focus to one based upon delivering broader solutions to customers. Herman Miller is retooling its core business to speak to customers with fresh insights, to spur new demand, and to change the game with unique solutions and services.

From North America Centric to Global — The second shift in our strategy aims to transform the business into a truly global organization. Herman Miller has a solid existing customer base, but sees meaningful opportunity in emerging markets with supportive demographics. The company is positioning itself to take maximum advantage of these shifts.

From The Office to Everywhere — The third fundamental strategic shift is moving from the office to everywhere. Herman Miller envisions continued leadership and viability in the contract furniture industry, but also sees distinct targeted opportunities through focused market segmentation. The company envisions a total offering for customers to enable “a lifestyle of purpose.”


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From Industry brand to Industry + Consumer brand — The fourth shift in strategy involves the company's ambition to expand the connection of its powerful brand more directly with the consumers of its products. With a legacy of decades of design leadership, Herman Miller is a brand that people desire and want to know. The company envisions a business that harnesses its brand vision to pull consumers to it.

This year the company has added one additional shift - product marketing to pull marketing - that it believes is required in order to reach the full velocity of its intended transformation. In other words, the company believes that this additional shift will put its strategy into Overdrive, which is what the strategy has been named.

Herman Miller intends to grow in targeted ways. First, the company will invest in areas that increase its existing markets across focused customer segments (such as healthcare, education, small and medium business, and consumer). Second, it will expand into emerging geographic markets that offer growth potential based upon their supportive demographics. Third, it will continue to invest in innovative products, which has been a hallmark of its success for many years. Finally, the company will grow through targeted acquisitions.

Industry Analysis
The Business and Institutional Furniture Manufacturer's Association (BIFMA) is the trade association for the North American contract furniture industry. The company monitors the trade statistics reported by BIFMA and considers 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 North American market. The contract segment of the industry relates primarily to products sold to large to mid-size corporations and installed via a network of dealers. The office supply segment relates primarily to products sold to smaller customers via wholesalers and retailers. The company participates, and is a leader in, the contract segment. Further, the company's diversification strategy lessens its dependence on the North American contract office furniture market.

The company analyzes BIFMA statistical information as a benchmark comparison against the performance of its contract business in North America and also to that of its 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 the company uses internally as one of several considerations in its short and long-range planning process.

After many years of compiling and reporting member production data for the U.S. market, BIFMA is revising its data collection process in an attempt to better reflect contract furniture production throughout North America, including products manufactured in Canada and Mexico. Prior to this change, products manufactured in Canada or Mexico and shipped to the U.S. were excluded from BIFMA’s estimate of industry shipments and orders. The new methodology is designed to provide a better reflection of the market as a whole, especially given the rise in competition based in Canada and Mexico as well as sourcing moves by the company's existing competitors. Additionally, BIFMA has revised its product definitions to better fit products specifically designed for the Healthcare and Education end markets. The net effect of this is that the estimated market size for the North American contract industry will increase substantially - resulting in a re-orientation of market share estimates across each industry participant. However, any BIFMA statistics that are mentioned throughout this document are based on the historical method of compiling the industry data and the company anticipates disclosure of BIFMA statistical data under the new method in the first quarter of fiscal 2017.

The company also monitors trade statistics reported by the U.S. Census Bureau, which reports monthly retail sales growth data across a number of retail categories, including Furniture and Home Furnishing Stores. This information provides a relative comparison to our Consumer reportable segment.

Looking forward, the general economic outlook for our industry in the North America is expected to be positive. BIFMA issued its most recent report in February 2016, which forecasts that the growth rate of office furniture orders will be 3.1 percent and 4.4 percent in calendar 2016 and 2017, respectively, while the growth rate of shipments will be 1.0 percent and 4.8 percent for calendar 2016 and 2017, respectively. This forecast of growth is based primarily on employment gains in the U.S., tempered by the current global economic uncertainty.



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Discussion of Business Conditions
During fiscal 2016, we demonstrated further progress on our strategic and operational initiatives, evidenced by record annual net sales of $2,264.9 million. Fiscal 2016 net sales increased 5.7 percent from the fiscal 2015 net sales of $2,142.2 million. The growth in net sales, combined with continued gross margin expansion and controlled operating expenses, drove earnings growth, as operating earnings increased 29.4 percent in fiscal 2016 over the prior year. Diluted earnings per share increased to $2.26 in fiscal 2016, as compared to $1.62 in fiscal 2015. The company also announced an increase in its quarterly cash dividend to $0.17 per share, payable in October 2016. This change represents an increase of 15.3 percent from the current dividend payout of $0.1475 per share.

The growth in sales and earnings during fiscal 2016 brought with it increased cash generation. As of the end of fiscal 2016, total cash and cash equivalents of $84.9 million represented an increase of $21.2 million from fiscal 2015. Cash flows from operations in the period were $210.4 million, which represented an increase of 25.5 percent from fiscal 2015.

The North American segment contributed significantly to our growth in net sales, orders, and earnings during fiscal 2016. Net sales for the segment grew at a rate of 7.2 percent and orders increased by 8.1 percent as compared to fiscal 2015. Organic net sales growth for the year was 8.2 percent (1) and orders increased 9.0 percent, while operating earnings increased 21.4 percent to $152.0 million during fiscal 2016. We believe this improvement demonstrates the impact of our investments over the past year in new products, refreshed showrooms and a solutions-based selling approach that provides our customers with problem solving designs.

In spite of the negative impact of foreign currency translation, the ELA segment posted growth in net sales (0.7 percent) and operating earnings (36.3 percent) as compared to the prior year, while orders for the period decreased by 0.1 percent. On a constant currency basis relative to fiscal 2015, net sales growth for the year was 7.0 percent (1) and orders increased 6.2 percent. During fiscal 2016, a new manufacturing and distribution facility was opened in the United Kingdom, which has bolstered operational efficiency. Assembly operations were also launched in India, significantly expanding our ability to service customers in this growing market. Finally, the Asia-Pacific region has benefited from renewed momentum of the POSH brand, which delivered sales growth and improved profitability throughout the year.

Our Specialty segment also showed growth as compared to the prior year. Sales increased 5.4 percent compared to fiscal 2015, driven mainly by improved sales volumes related to Geiger wood products and the Herman Miller Collection. Operating earnings increased $2.9 million from fiscal 2015. Increased sales volumes, decreases in material costs and improved operational efficiencies had a favorable impact on operating earnings for the Specialty segment.

The Consumer segment saw an increase in net sales of $18.2 million in the current fiscal year as compared to fiscal 2015. An increase of $30.2 million was driven by the fact that 52 weeks of DWR results were included in our consolidated results for fiscal 2016 as compared to 44 weeks in fiscal 2015. Sales were adversely impacted primarily by the following factors:

Continued impact from closing smaller legacy DWR studio locations as we look to transition into larger format studios.
Interruptions in selling activity resulting from the implementation of a new Enterprise Resource Planning ("ERP") system at DWR, during the second quarter of fiscal 2016.
Continued impact from the deliberate reduction in the number of independent retail distributors within our legacy consumer wholesale business.

While the current year results for the Consumer segment did not meet our expectations, we believe the value drivers within the Consumer segment remain intact to drive future growth. These drivers include the transition of DWR studios to larger, more efficient formats, and increasing the breadth of the product portfolio, particularly in the area of exclusive product designs.

The economic backdrop of our businesses was mixed globally. North America continued to benefit from strong employment and encouraging construction and architectural billings data. Commodity costs, particularly that of steel, remained relatively low throughout fiscal 2016 though in recent months has been steadily increasing. Outside of North America, we are closely monitoring commodity-driven economies that are currently (or are expected to experience) slower growth in the future. In addition, growing uncertainty over the impact of a United Kingdom exit from the European Union is an area of concern for our business in that important market.

(1) Non-GAAP measurements; see accompanying reconciliations and explanations.


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Reconciliation of Non-GAAP Financial Measures
This report contains references to Organic net sales, Adjusted operating earnings, Adjusted EBITDA and Adjusted earnings per share diluted, all of which are non-GAAP financial measures (referred to collectively as the "Adjusted financial measures"). The Adjusted financial measures are calculated by excluding from Gross Margin, Operating expenses, Operating earnings and Earnings per share - diluted items that we believe are not indicative of our ongoing operating performance. Such items consist of the following:
Expenses associated with restructuring actions taken to adjust our cost structure to the current business climate
Expenses associated with acquisition-related inventory adjustments
Transaction expenses associated with recent acquisitions
Non-cash impairment expenses
Non-recurring gains related to the sale of property and dealers, and
Impact of non-recurring tax items

Adjusted EBITDA is calculated by excluding depreciation, amortization and other net income or expense from Adjusted Operating Earnings. Organic sales represents the change in Net sales, excluding currency translation effects and the impact of acquisitions. We present the adjusted financial measures because we consider them to be important supplemental measures of our performance and believe them to be useful in analyzing ongoing results from operations.

The Adjusted financial measures are not measurements of our financial performance under GAAP and should not be considered an alternative to Gross margin, Operating expenses, Operating earnings (loss) and Earnings (loss) per share diluted under GAAP. The Adjusted financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Our presentation of the Adjusted financial measures should not be construed as an indication that our future results will be unaffected by unusual or infrequent items. We compensate for these limitations by providing prominence of our GAAP results and using the Adjusted financial measures only as a supplement.

The following table reconciles Net sales to Organic net sales for the years and reportable operating segments indicated.
 
Fiscal Year Ended
Fiscal Year Ended
 
May 28, 2016
May 30, 2015
 
North America
ELA
Specialty
Consumer
Total
North America
ELA
Specialty
Consumer
Total
Net Sales, as reported
$
1,331.8

$
412.6

$
231.8

$
288.7

$
2,264.9

$
1,241.9

$
409.9

$
219.9

$
270.5

$
2,142.2

% change from PY
7.2
%
0.7
%
5.4
%
6.7
 %
5.7
%


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency Translation Effects (1)
12.5

26.1

0.6

0.8

40.0






Acquisition



(30.2
)
(30.2
)





Organic Net Sales
$
1,344.3

$
438.7

$
232.4

$
259.3

$
2,274.7

$
1,241.9

$
409.9

$
219.9

$
270.5

$
2,142.2

% change from PY
8.2
%
7.0
%
5.7
%
(4.1
)%
6.2
%
 
 
 
 
 


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Fiscal Year Ended
Fiscal Year Ended
 
May 30, 2015
May 31, 2014
 
North America
ELA
Specialty
Consumer
Total
North America
ELA
Specialty
Consumer
Total
Net Sales, as reported
$
1,241.9

$
409.9

$
219.9

$
270.5

$
2,142.2

$
1,216.3

$
392.2

$
205.8

$
67.7

$
1,882.0

% change from PY
2.1
%
4.5
%
6.9
%
299.6
%
13.8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dealer Divestitures





(12.1
)



(12.1
)
Currency Translation Effects (1)
7.2

16.8

0.4

0.4

24.8






Acquisition



(194.3
)
(194.3
)





Organic Net Sales
$
1,249.1

$
426.7

$
220.3

$
76.6

$
1,972.7

$
1,204.2

$
392.2

$
205.8

$
67.7

$
1,869.9

% change from PY
3.7
%
8.8
%
7.0
%
13.1
%
5.5
%
 
 
 
 
 

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 2016
 
% Change from 2015
 
Fiscal 2015
 
% Change from 2014
 
Fiscal 2014
52 weeks
 
 
52 weeks
 
 
52 weeks
Net sales
$
2,264.9

 
5.7
 %
 
$
2,142.2

 
13.8
 %
 
$
1,882.0

Cost of sales
1,390.7

 
3.0
 %
 
1,350.8

 
8.0
 %
 
1,251.0

Gross margin
874.2

 
10.5
 %
 
791.4

 
25.4
 %
 
631.0

Operating expenses
662.7

 
5.5
 %
 
628.0

 
(4.4
)%
 
656.7

Operating earnings (loss)
211.5

 
29.4
 %
 
163.4

 
735.8
 %
 
(25.7
)
Net other expenses
14.9

 
(18.1
)%
 
18.2

 
2.8
 %
 
17.7

Earnings (loss) before income taxes
196.6

 
35.4
 %
 
145.2

 
434.6
 %
 
(43.4
)
Income tax expense (benefit)
59.5

 
26.1
 %
 
47.2

 
322.6
 %
 
(21.2
)
Equity income (loss) from nonconsolidated affiliates, net of tax
0.4

 
300.0
 %
 
0.1

 
 %
 
0.1

Net earnings (loss)
137.5

 
40.2
 %
 
98.1

 
543.9
 %
 
(22.1
)
Net earnings attributable to noncontrolling interests
0.8

 
33.3
 %
 
0.6

 
N/A
 

Net earnings (loss) attributable to Herman Miller, Inc.
$
136.7

 
40.2
 %
 
$
97.5

 
541.2
 %
 
$
(22.1
)

The following table presents, for the periods indicated, the components of the company's Consolidated Statements of Comprehensive Income as a percentage of net sales.

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Fiscal 2016
 
Fiscal 2015
 
Fiscal 2014
Net sales
100.0
%
 
100.0
%
 
100.0
 %
Cost of sales
61.4

 
63.1

 
66.5

Gross margin
38.6

 
36.9

 
33.5

Selling, general, and administrative expenses
25.9

 
25.4

 
30.0

Restructuring and impairment expenses

 
0.6

 
1.4

Design and research expenses
3.4

 
3.3

 
3.5

Total operating expenses
29.3

 
29.3

 
34.9

Operating earnings (loss)
9.3

 
7.6

 
(1.4
)
Net other expenses
0.7

 
0.8

 
0.9

Earnings (loss) before income taxes
8.7

 
6.8

 
(2.3
)
Income tax expense (benefit)
2.6

 
2.2

 
(1.1
)
Equity income (loss) from nonconsolidated affiliates, net of tax

 

 

Net earnings (loss)
6.1

 
4.6

 
(1.2
)
Net earnings attributable to noncontrolling interests

 

 

Net earnings (loss) attributable to Herman Miller, Inc.
6.0

 
4.6

 
(1.2
)


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Net Sales, Orders, and Backlog - Fiscal 2016 Compared to Fiscal 2015
Consolidated net sales increased $122.7 million to $2,264.9 million from $2,142.2 million for the fiscal year ended May 28, 2016 compared to the fiscal year ended May 30, 2015. The following items contributed to the change:

Increased sales volumes within the North American segment of approximately $108.0 million were driven by a combination of general market growth and company-specific actions taken to improve selling capacity, launch innovative products and refresh showrooms.
Increased sales volumes within the ELA segment of $30.4 million were driven by increases within the Asia region. The largest increases were due to larger project activity in Australia and China.
Incremental sales volume within the Consumer segment related to the acquisition of DWR, which increased sales by $30.2 million. This increase was due the fact that 52 weeks of DWR results were included in our consolidated results for fiscal 2016 as compared to 44 weeks in fiscal 2015.
Increased sales volumes within the Specialty segment of $10.9 million were driven principally by Geiger and the Herman Miller Collection.
Foreign currency translation had a negative impact on sales of $40.0 million.

Consolidated net trade orders for fiscal 2016 totaled $2,279.7 million compared to $2,146.5 million in fiscal 2015, an increase of 6.2 percent. Order rates began the year at an average pace of approximately $43 million per week for the first quarter and $46 million per week for the second quarter. For the third quarter, weekly order rates decreased to an average of approximately $39 million per week, reflecting typical seasonality in order pacing during that period of the fiscal year. The fourth quarter finished the year with average weekly order rates increasing to approximately $47 million. The overall impact of foreign currency changes for the fiscal year decreased net orders by approximately $38.7 million as compared to the prior year.

Our backlog of unfilled orders at the end of fiscal 2016 totaled $323.5 million, a 0.4 percent increase from the fiscal 2015 ending backlog of $322.2 million. At the end of fiscal 2016, the company completed the sale of its multi-location dealership in Australia. This dealer divestiture resulted in a reduction to the consolidated ending backlog of approximately $14 million.

BIFMA reported an estimated period-over-period increase in U.S. office furniture shipments of approximately 3.2 percent for the twelve-month period ended May 2016. By comparison, net sales increased for the company's domestic U.S. business by approximately 6.3 percent over the twelve months ended May 2016, reflecting the strong results within our North America segment noted above.

We also monitor trade statistics reported by the U.S. Census Bureau, which reports monthly retail sales growth data across a number of retail categories, including Furniture and Home Furnishing Stores. This information provides a relative comparison to our Consumer reportable segment, but is not intended to be an exact comparison. The average monthly year-over-year growth rate in sales for the Furniture and Home Furnishing Stores category for the twelve month period ended May 31, 2016, was approximately 4.9 percent. By comparison, net sales growth for the company's Consumer segment was approximately 6.7 percent, while that segment posted an Organic net sales decrease of 4.1 percent (1).

(1) Non-GAAP measurements; see accompanying reconciliations and explanations.


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Net Sales, Orders, and Backlog - Fiscal 2015 Compared to Fiscal 2014

For the fiscal year ended May 30, 2015, consolidated net sales increased $260.2 million to $2,142.2 million from $1,882.0 million for the fiscal year ended May 31, 2014. The following items contributed to the change:

Incremental sales volumes within the Consumer segment related to the acquisition of DWR, which increased sales by $194.3 million.
Increased sales volumes within the ELA segment of $38.5 million due primarily to increases within the EMEA and Asia regions.
Foreign currency translation had a negative impact on sales of $24.8 million.
The remaining increase was driven by a combination of factors, including the timing of project completion and the conversion of existing backlog into sales within the North American business segment.

Consolidated net trade orders for fiscal 2015 totaled $2,146.5 million compared to $1,917.7 million in fiscal 2014, an increase of 11.9 percent. Order rates began the year at an average pace of approximately $40 million per week for the first quarter and $44 million per week for the second quarter. For the third quarter, weekly order rates decreased to an average of approximately $39 million per week. The fourth quarter finished the year with average weekly order rates increasing to approximately $43 million.

The weekly order pacing in the third quarter and the fourth quarter of fiscal 2015 was impacted by the price increase that was announced during the third quarter of fiscal 2015. This caused approximately $21 million of orders that otherwise would have been entered in the fourth quarter, to be entered in the third quarter. When adjusting for this impact, the weekly pacing of orders for the third quarter and fourth quarter was $37 million per week and $45 million per week, respectively. The overall impact of foreign currency changes for the fiscal year decreased net orders by approximately $24.1 million as compared to the prior year.

Our backlog of unfilled orders at the end of fiscal 2015 totaled $322.2 million, a 5.2 percent increase from the $306.4 million of backlog at the end of fiscal 2014.

BIFMA reported an estimated year-over-year increase in U.S. office furniture shipments of approximately 6.3 percent for the twelve-month period ended May 2015. By comparison, net sales increased for the company's domestic U.S. business by approximately 3.0 percent. The company believes that while comparisons to BIFMA are important, the company continues to pursue a strategy of revenue diversification that makes us less reliant on the drivers that impact BIFMA.

As reported by the U.S. Census Bureau, the average monthly year-over-year growth rate in sales for the Furniture and Home Furnishing Stores category for the twelve month period ended May 31, 2015, was approximately 4.0 percent. By comparison, net sales growth for the Consumer segment was approximately 299.6 percent, while Organic net sales growth for the Consumer reportable segment was 13.1 percent (1).

(1) Non-GAAP measurements; see accompanying reconciliations and explanations.

Gross Margin - Fiscal 2016 Compared to Fiscal 2015
Consolidated gross margin for Fiscal 2016 was 38.6 percent, an increase of 170 basis points from the fiscal 2015 level. The following factors summarize the major drivers of the year-over-year improvement in gross margin percentage:


- 26-



Lower commodity costs within the North American operating segment in the current fiscal year drove a favorable year-over-year margin impact of approximately 90 basis points.
A decrease in freight expenses, due primarily to lower fuel costs and improved leverage of fixed product distribution costs, drove a favorable impact to gross margin of approximately 40 basis points compared to fiscal 2015.
Inventory-related purchase accounting adjustments related to the acquisition of DWR unfavorably impacted gross margin in the prior year by approximately 30 basis points.
Improved production volume leverage at the company's West Michigan manufacturing facilities increased gross margin by approximately 30 basis points as compared to fiscal 2015.
We estimate that relative changes in foreign currency exchange rates had a negative impact on our consolidated gross margin of approximately 30 basis points relative to last fiscal year.
Improved operating efficiencies at certain international and domestic subsidiaries also provided a favorable impact to gross margin compared to last fiscal year.

Gross Margin - Fiscal 2015 Compared to Fiscal 2014
Consolidated gross margin for Fiscal 2015 was 36.9 percent, an increase of 340 basis points from the fiscal 2014 level. The following factors summarize the major drivers of the year-over-year change in gross margin percentage:

Charges related to the termination of the company's primary defined benefit pension plan led to a 240 basis point decrease in gross margin during fiscal 2014.
The benefit captured from price increases - net of incremental discounting, provided a 40 basis point improvement compared to fiscal 2014.
We estimate that relative changes in foreign currency exchange rates had a negative impact on our consolidated gross margin of approximately 30 basis points relative to fiscal 2014.
The remainder of the change in gross margin during fiscal 2015 as compared to fiscal 2014 was driven by improved production, product, and channel mix.

Operating Expenses - Fiscal 2016 Compared to Fiscal 2015
Operating expenses in fiscal 2016 were $662.7 million, or 29.3 percent of net sales, which compares to $628.0 million, or 29.3 percent of net sales in fiscal 2015. The following factors contributed to the change:

Employee incentive costs increased by $14.7 million relative to fiscal 2015. The increase reflects higher incentive compensation costs that are tied to increased earnings for the comparative periods.
Marketing and selling expenses increased $14.5 million relative to fiscal 2015. The increase resulted from new marketing initiatives, particularly within the Consumer segment, as well as increases in selling capacity and sales growth during fiscal 2016.
Fiscal 2016 included a full 52 weeks of DWR results whereas fiscal 2015 included only 44 weeks. This difference accounts for approximately $13.7 million of the year-over-year increase in consolidated operating expenses.
Design and research expenses increased $5.7 million in fiscal 2016 as compared to the prior year.
Year-over-year changes in currency exchange rates decreased operating expenses by an estimated $10 million.
Fiscal 2015 results reflected restructuring and impairment expenses of $12.7 million.
The remaining change relates to various contributing factors, including but not limited to higher costs for information technology initiatives, wage and benefit inflation, and general variability with higher net sales.


- 27-



Restructuring and Impairment - Fiscal 2016 Compared to Fiscal 2015
There were no restructuring and impairment charges for fiscal 2016. By comparison, fiscal 2015 included restructuring and impairment expenses totaling $12.7 million, including $1.9 million related to targeted workforce reductions within the North American segment and $10.8 million in impairment expenses related to the impairment of the POSH trade name.

For the fiscal year ended May 28, 2016, restructuring liabilities of $0.4 million were included in "Other accrued liabilities" within the Consolidated Balance Sheet. See Note 17 of the Consolidated Financial Statements for additional information on restructuring and impairment expenses.

Operating Expenses - Fiscal 2015 Compared to Fiscal 2014
Operating expenses in fiscal 2015 were $628.0 million, or 29.3 percent of net sales, which compares to $656.7 million, or 34.9 percent of net sales in fiscal 2014. The following factors contributed to the change:

The acquisition of DWR contributed an additional $81.5 million of operating expenses in fiscal 2015 as compared to fiscal 2014.
Warranty expenses increased by approximately $4.8 million in fiscal 2015 as compared to the prior year. The increase in warranty expense was due to updating claims loss experience in warranty liability estimates, additional sales of new products, and an increase in customer specific claims as compared to the prior year.
Design and research expenses increased $4.3 million in fiscal 2015 as compared to the prior year.
Year-over-year changes in currency exchange rates decreased operating expenses by an estimated $5 million.
As compared to fiscal 2014, restructuring and impairment expenses decreased by $13.8 million.
The impact of pension termination expenses of $113.1 million that were recorded in fiscal 2014.
The remaining change was driven by net changes in various other operating expenses compared to the prior year period.

Restructuring and Impairment - Fiscal 2015 Compared to Fiscal 2014
Restructuring and impairment charges decreased $13.8 million from $26.5 million in fiscal 2014 to $12.7 million in fiscal 2015. During fiscal 2014, restructuring and impairment expenses included $4.0 million related to the impairment of property in Ningbo, China, $1.1 million related to restructuring actions taken to improve the efficiency of the North American sales and distribution channel and Geiger manufacturing operations and $21.4 million in impairment expenses related to the POSH and Nemschoff trade names.

For the fiscal year ended May 30, 2015, restructuring liabilities of $1.4 million were included in "Other accrued liabilities" within the Consolidated Balance Sheet. See Note 17 of the Consolidated Financial Statements for additional information on restructuring and impairment expenses.

Operating Earnings
In fiscal 2016, the company generated operating earnings of $211.5 million, an increase of $48.1 million from fiscal 2015 operating earnings of $163.4 million. Operating earnings of $163.4 million in fiscal 2015 represented a $189.1 million increase from fiscal 2014 operating loss of $25.7 million.


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Other Expenses and Income
Net other expenses for fiscal 2016 were $14.9 million, a decrease of $3.3 million compared to net other expenses in fiscal 2015 of $18.2 million. Net other expenses in fiscal 2014 totaled $17.7 million. The decrease in net other expenses in fiscal 2016 was primarily related to a reduction in interest expense related to a decrease in long term debt. The reduction in long term debt resulted from the repayment of borrowings on the revolving line of credit. The increase in Net other expenses in fiscal 2015 as compared to fiscal 2014 was primarily related to an increase in currency loss as compared to fiscal 2014.

Income Taxes
The company's effective tax rate was 30.3 percent in fiscal 2016, 32.6 percent in fiscal 2015, and 48.9 percent in fiscal 2014. The effective tax rate in fiscal 2016 was below the statutory rate of 35 percent, primarily due to the domestic U.S. manufacturing deduction as well as a significant amount of foreign earnings subject to tax at foreign rates below 35 percent.

The effective tax rate in fiscal 2015 was below the statutory rate of 35 percent, primarily due to the domestic U.S. manufacturing deduction and a $3.9 million tax benefit related to a foreign entity reorganization.

The effective tax rate in fiscal 2014 was above the statutory rate of 35 percent, primarily due to the domestic U.S. manufacturing deduction and a shift in the relative mix of income and loss between the taxing jurisdictions. This change in mix was driven primarily by legacy pension expenses recorded in that fiscal year.

For further information regarding income taxes, refer to Note 10 of the Consolidated Financial Statements.

Net Earnings (Loss); Earnings (Loss) per Share
In fiscal 2016, fiscal 2015, and fiscal 2014, the company generated net earnings of $137.5 million, net earnings of $98.1 million and a net loss of $22.1 million, respectively. Diluted earnings per share were $2.26 and $1.62 for fiscal 2016 and fiscal 2015, respectively, while diluted loss per share was $0.37 in fiscal 2014.

Reportable Operating Segments
The business is comprised of various operating segments as defined by generally accepted accounting principles in the United States. These operating segments are determined on the basis of how the company internally reports and evaluates financial information used to make operating decisions. The company has identified the following reportable segments:
North American Furniture Solutions — Includes the operations associated with the design, manufacture, and sale of furniture products for work-related settings, including office, education, and healthcare environments, throughout the United States and Canada. The North American Furniture Solutions reportable segment is the aggregation of two operating segments. In addition, the company has determined that both operating segments within the North American Furniture Solutions reportable segment each represent reporting units.

ELA Furniture Solutions — Includes EMEA, Latin America, and Asia-Pacific operations associated with the design, manufacture and sale of furniture products, primarily for work-related settings.

Specialty — Includes operations associated with the design, manufacture, and sale of high-craft furniture products and textiles including Geiger wood products, Maharam textiles, and Herman Miller Collection products.

Consumer — Includes operations associated with the sale of modern design furnishings and accessories to third party retail distributors, as well as direct to consumer sales through e-commerce, direct mailing catalogs, and DWR retail studios.

The company also reports a corporate category consisting primarily of, as applicable, unallocated corporate expenses including restructuring, impairment, acquisition-related costs, and other unallocated corporate costs.

The charts below present the relative mix of net sales across each of the company's reportable segments. This is followed by a discussion of the company's results, by segment, for each reportable segment.

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North American Furniture Solutions ("North America")

Fiscal 2016 Compared to Fiscal 2015
Net sales in the North American segment increased to $1,331.8 million in fiscal 2016, an increase of $89.9 million from fiscal 2015 net sales of $1,241.9 million. Orders for fiscal 2016 totaled $1,336.1 million, an increase of $100.3 million from fiscal 2015. Operating earnings for North America in fiscal 2016 were $152.0 million, a $26.8 million increase from fiscal 2015.

Sales volumes within the North American segment increased by approximately $108 million. This was driven by a combination of general market growth and company-specific actions taken to improve selling capacity, launch innovative products, and refresh showrooms.
The impact of foreign currency translation decreased net sales by approximately $13 million.
Changes in pricing, net of incremental discounting, decreased fiscal 2016 net sales between $5 million and $7 million compared to the prior year.
Operating earnings increased mainly due to improvements in gross margin that were driven by increased sales volumes, improved production volume leverage, a decrease in commodity costs, and improved operational efficiency.
Higher incentive compensation expenses had an unfavorable impact on operating earnings of $18.6 million.
The impact of foreign currency changes decreased fiscal 2016 operating earnings for North America by approximately $7 million.

Fiscal 2015 Compared to Fiscal 2014
Net sales increased to $1,241.9 million in fiscal 2015, an increase of $25.6 million from fiscal 2014 net sales of $1,216.3 million. Operating earnings for North America in fiscal 2015 were $125.2 million, an increase of $152.2 million in fiscal 2014.

Dealer divestitures in fiscal 2014 had the impact of reducing net sales by approximately $12 million during fiscal 2015.
Foreign currency changes decreased fiscal 2015 net sales by approximately $7 million.
Changes in pricing, net of incremental discounting, increased fiscal 2015 net sales between $11 million and $13 million compared to the prior year.
Decreased sales volumes to the U.S. federal government drove a $4.4 million decrease in net sales as compared to fiscal 2014.
The rest of the increase in sales during fiscal 2015 was due to higher volumes, the timing of project completions, and the conversion of existing backlog into sales.
Non-recurring legacy pension expenses of $147.0 million decreased operating earnings during fiscal 2014. These costs related to the termination of the primary domestic defined benefit pension plans.
The remaining change in operating earnings was due to growth in gross margin that was driven by improvements in pricing, net of discounting, and improved product mix.

ELA Furniture Solutions (EMEA, Latin America, and Asia Pacific)
Fiscal 2016 Compared to Fiscal 2015
Net sales increased to $412.6 million in fiscal 2016, an increase of $2.7 million from fiscal 2015 net sales of $409.9 million. Orders for fiscal 2016 totaled $417.0 million, a decrease of $0.6 million from fiscal 2015. Operating earnings within ELA for fiscal 2016 were $35.3 million, a $9.4 million increase from fiscal 2015.

An increase in sales volumes within Australia, Mexico and China drove an increase in net sales of approximately $31 million.

- 30-



Changes in pricing, net of incremental discounting, decreased fiscal 2016 net sales between $1 million and $3 million compared to the prior year.
The impact of foreign currency translation decreased net sales by approximately $26.1 million.
Gross margin improvements driven by increased sales volumes, manufacturing efficiency as well as decreased material and freight costs provided a favorable impact on operating earnings.
Nonrecurring gains related to the sale of a former manufacturing facility in the United Kingdom and the divestiture of the company’s dealership in Australia increased operating earnings by $6.1 million.
The impact of foreign currency changes decreased fiscal 2015 operating earnings for ELA by approximately $7 million.

Fiscal 2015 Compared to Fiscal 2014
Net sales increased 4.5 percent to $409.9 million in fiscal 2015 as compared to fiscal 2014. Operating earnings within ELA for fiscal 2015 were $25.9 million, a $2.8 million increase from fiscal 2014.

On a constant currency basis, net sales increased approximately $35 million during fiscal 2015 as compared to fiscal 2014, due to growth in sales volumes within the EMEA and Asia regions.
The impact of foreign currency changes decreased fiscal 2015 operating earnings for ELA by approximately $9 million.
Year-over-year, improved sales volumes in the EMEA and Asia regions along with the improved manufacturing efficiency at the company's United Kingdom and Asia manufacturing operations led to an increase in operating earnings.

Specialty
Fiscal 2016 Compared to Fiscal 2015
Net sales within the Specialty reportable segment increased to $231.8 million for fiscal 2016, an improvement of $11.9 million as compared to fiscal 2015. Orders for fiscal 2016 totaled $234.8 million, an increase of $13.4 million from fiscal 2015. Operating earnings within the Specialty reportable segment totaled $16.4 million for the year, an increase of $2.9 million from fiscal 2015.

Improved sales volumes drove an increase in net sales of $10.9 million, which was driven by increases within the Herman Miller Collection and Geiger subsidiary.
Changes in pricing, net of incremental discounting, increased fiscal 2015 net sales between $1 million and $3 million compared to the prior year.
Increased sales volumes and improved operational efficiencies had a favorable impact on operating earnings.
Higher incentive compensation expenses and increased marketing and selling costs had an unfavorable impact on operating earnings of $2.3 million and $1.9 million, respectively.

Fiscal 2015 Compared to Fiscal 2014
Net sales within the Specialty reportable segment were $219.9 million during fiscal 2015, an increase of $14.1 million compared to fiscal 2014. Orders for fiscal 2015 totaled $221.4 million, an increase of $13.2 million from fiscal 2014. Operating earnings within the Specialty reportable segment totaled $13.5 million for the year, an increase of $18.8 million from fiscal 2014.

Sales volumes increased mainly due to improved volumes of Geiger and Herman Miller Collection products.
Non-recurring legacy pension expenses of $12.2 million decreased operating earnings during fiscal 2014. These costs related to the termination of the primary domestic defined benefit pension plans.
Inventory-related purchase accounting adjustments from the Maharam acquisition decreased operating earnings by $1.4 million during fiscal 2014.
The remaining increase in operating earnings was driven by improved operating performance and leverage from both the Geiger and Maharam subsidiaries.

Consumer
Fiscal 2016 Compared to Fiscal 2015
Net sales for the Consumer reportable segment increased to $288.7 million in fiscal 2016, an increase of $18.2 million from fiscal 2015 net sales of $270.5 million. Orders for fiscal 2016 totaled $291.7 million, an increase of $20.0 million from fiscal 2015. Operating earnings within the Consumer segment were $8.1 million during fiscal 2016 as compared to operating earnings of $14.7 million in fiscal 2015.

The fiscal year ended May 30, 2015 included 44 weeks of DWR operations (as the acquisition of DWR was completed on July 28, 2014). Accordingly, approximately $30.2 million of the year-over-year net sales increase for this segment is due to this inclusion of DWR operations for the full twelve months of the current fiscal year.
Adjusted for the impact of this partial period consolidation during last fiscal year and the impact of foreign currency translation, which increased net sales by $0.8 million, net sales for the Consumer segment decreased $11.2 million as compared to fiscal

- 31-



2015. This was driven by the closing of legacy DWR studios, selling activity interruptions from the implementation of a new ERP system at DWR and the rationalization of independent retail distributors.
The decrease in operating earnings was driven by a reduction in the gross margin percentage at DWR due to a shift in mix to lower margin channels, the impact of promotional activity related to shipping and certain period costs associated with an ERP implementation.
An increase in DWR operating expenses of $8.2 million decreased operating earnings. The increase in operating expenses was due to increased marketing investment, higher staffing levels and incremental occupancy costs that were driven by studio opening costs and double rent associated with new studio openings.
These factors were partially offset by inventory-related purchase accounting adjustments that reduced prior year operating earnings by approximately $7.8 million.

Fiscal 2015 Compared to Fiscal 2014
Net sales for the Consumer reportable segment increased to $270.5 million in fiscal 2015, an increase of $202.8 million from fiscal 2014 net sales of $67.7 million. Orders for fiscal 2015 totaled $271.7 million, an increase of $202.3 million from fiscal 2014. Operating earnings within the Consumer segment were $14.7 million during fiscal 2015 as compared to operating earnings of $9.9 million in fiscal 2014.

The acquisition of DWR was completed in the first quarter of fiscal 2015, which drove an increase in net sales of $194.3 million as compared to fiscal 2014.
The remaining change in sales was driven by increases in pricing and higher sales volumes within the company's legacy wholesale and e-commerce consumer business.
Decreased legacy pension expenses during fiscal 2015 increased operating earnings $5.2 million as compared to fiscal 2014.
Inventory-related adjustments associated with the DWR acquisition decreased fiscal 2015 operating earnings by $7.8 million.
The remaining change in operating earnings was driven by increased gross margins and operating earnings associated with the acquisition of DWR as well as higher sales volumes within the company's existing consumer wholesale and e-commerce business.

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)
2016
 
2015
 
2014
Cash and cash equivalents, end of period
$
84.9

 
$
63.7

 
$
101.5

Marketable securities, end of period
$
7.5

 
$
5.7

 
$
11.1

Cash provided by operating activities
$
210.4

 
$
167.7

 
$
90.1

Cash used for investing activities
$
(80.8
)
 
$
(213.6
)
 
$
(48.2
)
Cash provided by (used for) financing activities
$
(106.5
)
 
$
6.8

 
$
(22.4
)
Pension and post-retirement benefit plan contributions (1)
$
(1.2
)
 
$
1.4

 
$
(50.2
)
Capital expenditures
$
(85.1
)
 
$
(63.6
)
 
$
(40.8
)
Stock repurchased and retired
$
(14.1
)
 
$
(3.7
)
 
$
(12.7
)
Interest-bearing debt, end of period
$
221.9

 
$
289.8

 
$
250.0

Available unsecured credit facilities, end of period (2) (3)
$
232.1

 
$
164.5

 
$
155.1

(1) Amount shown for fiscal 2014 includes $48.8 million due to the termination of the company's primary domestic defined benefit pension plan.
(2) Amounts shown are net of outstanding letters of credit, which are applied against the company's unsecured credit facility.
(3) During fiscal 2015, we renegotiated the unsecured revolving credit facility. Refer to Note 5 of the Consolidated Financial Statements for additional information.

Cash Flow — Operating Activities
Cash generated from operating activities in fiscal 2016 totaled $210.4 million compared to $167.7 million generated in the prior year. This represents an increase of $42.7 million compared to fiscal 2015.

Changes in working capital balances resulted in a $6.0 million use of cash in the current fiscal year compared to a $3.5 million source of cash in the prior year. The use of cash related to changes in working capital balances in fiscal 2016 consisted primarily of an increase in trade receivables of $30.5 million, an increase in inventory of $6.0 million, and an increase to prepaid expenses of $11.7 million. This was partially offset by an increase in accrued compensation and benefits of $19.4 million, an increase to accounts payable of $8.7 million, and an increase to other accrued liabilities of $14.1 million.

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During fiscal 2014 the company contributed $50.2 million to its employee pension and post-retirement plans. The majority of these contributions related to funding associated with the termination of the company’s primary domestic defined benefit pension plan. Collectively, these plan contributions reduced cash flows generated from operations in fiscal 2014. By comparison, company's contributions to these plans in fiscal 2015 totaled $1.2 million.

Changes in working capital balances resulted in a $3.5 million source of cash in fiscal 2015 as compared to a $21.2 million use of cash in fiscal 2014. The sources of cash related to changes in working capital balances in fiscal 2015 consisted primarily of a decrease in trade receivables of $7.8 million, an increase in accounts payable of $1.1 million and an increase in accrued liabilities of $6.1 million. This was partially offset by increases in inventory and prepaid expenses of $9.0 million and $2.5 million, respectively. Note that the change in working capital assets and liabilities excludes the impact of amounts acquired through business combinations.

Collections of accounts receivable remained strong throughout fiscal 2016, and the company's recorded accounts receivable allowances at the end of the year are believed to be adequate to cover the risk of potential bad debts. Allowances for non-collectible accounts receivable, as a percent of gross accounts receivable, totaled 2.2 percent, 2.0 percent and 1.9 percent at the end of fiscal years 2016, 2015, and 2014, respectively.

Cash Flow — Investing Activities
Capital expenditures totaled $85.1 million, $63.6 million and $40.8 million in fiscal 2016, 2015, and 2014, respectively. The increase in capital expenditures of $21.5 million from fiscal 2015 to fiscal 2016 was driven primarily by payments related to the construction of a new facility in the United Kingdom for the purpose of consolidating manufacturing and distribution activities, as well as capital expenditures associated with product development and the opening of new DWR retail studio locations.

Proceeds from the sale of property and dealers increased to $10.7 million for fiscal 2016 as compared to $0.6 million for fiscal 2015. This increase was driven mainly by net cash proceeds received from the sale of a former manufacturing facility in the United Kingdom for $4.8 million and the divestiture of the company’s remaining 75 percent equity stake in its dealership in Australia for $2.7 million.

Outstanding commitments for future capital purchases at the end of fiscal 2016 were approximately $14.0 million. The company expects capital spending in fiscal 2017 to be between $80 million and $90 million. The capital spending will be allocated primarily to planned investments in product development and retail studio openings.

Included in the fiscal 2016, 2015 and 2014 investing activities are net cash outflows related to acquisitions. These amounts are summarized below:
(In millions)
2016
 
2015
 
2014
George Nelson Bubble Lamp Product Line
$
3.6

 
 
 
 
Design Within Reach (DWR)
 
 
$
154.0

 
 
Certain Assets of Dongguan Sun Hing Steel Furniture Factory Ltd (DGSH)
 
 
 
 
$
6.7


Our net marketable securities transactions for fiscal 2016 yielded a $1.7 million use of cash. This compares to a $5.3 million source of cash and $0.3 million use of cash in fiscal 2015 and fiscal 2014, respectively.

Cash Flow — Financing Activities
 
Fiscal Year Ended
(In millions, except share and per share data)
2016
 
2015
 
2014
Shares acquired
482,040

 
121,488

 
408,391

Cost of shares acquired
$
14.1

 
$
3.7

 
$
12.7

Shares issued
655,705

 
501,277

 
1,040,255

Average cash received per share issued
$
13.97

 
$
15.48

 
$
20.00

Cash dividends paid
$
34.9

 
$
33.3

 
$
30.3



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In fiscal 2016, cash used for financing activities was $106.5 million, as compared to cash provided by financing activities of $6.8 million in fiscal 2015. Cash outflows from net payments on the revolving credit facility were $68.0 million during fiscal 2016. By comparison, cash inflows from net borrowings on the revolving credit facility were $40.0 million during fiscal 2015.

Cash paid for the retirement of common stock was $14.1 million in the current year as compared to $3.7 million in the prior year. Additionally, in fiscal 2016 there was an increase in cash inflows from the issuance of shares related to stock-based compensation plans. The company received $9.2 million related to stock-based compensation plans in fiscal 2016 compared to $7.8 million in fiscal 2015.

Cash provided by financing activities was $6.8 million in fiscal 2015, as compared to cash used in financing activities of $22.4 million in fiscal 2014. Cash inflows from net borrowings on the revolving credit facility were $90.0 million during fiscal 2015. The company utilized a portion of these borrowings to pay off $50.0 million of Series A senior notes, which matured January 3, 2015.

Cash paid for the retirement of common stock was $3.7 million in fiscal 2015 as compared to $12.7 million in the prior year. Additionally, in fiscal 2015 there was a decrease in cash inflows from the issuance of shares related to stock-based compensation plans. The company received $7.8 million related to stock-based compensation plans in fiscal 2015 compared to $20.8 million in fiscal 2014.

Some minority shareholders in a subsidiary have the right, at certain times, to require the company to acquire a portion of their ownership interest in those entities at fair value. It is possible that within the next five years the company could be required to acquire this ownership interest. The fair value of this redeemable noncontrolling interest as of May 28, 2016 was $27.0 million and is included within "Redeemable noncontrolling interests" on the Consolidated Balance Sheets.

Sources of Liquidity
In addition to cash flows from operating activities, the company has access to liquidity through credit facilities, cash and cash equivalents and short-term investments. These sources have been summarized below. For additional information, see Note 5 to the consolidated financial statements.
(In millions, )
2016
 
2015
Cash and cash equivalents
$
84.9

 
$
63.7

Marketable securities
$
7.5

 
$
5.7

Availability under revolving lines of credit
$
232.1

 
$
164.5

At the end of fiscal 2016, the company had cash and cash equivalents of $84.9 million, including foreign cash and cash equivalents of $67.6 million. In addition, the company had foreign marketable securities of $7.5 million. The foreign subsidiary holding the company's marketable securities is taxed as a U.S. taxpayer at the company's election; consequently, for tax purposes, all U.S tax impacts for this subsidiary have been recorded. The company's intent is to permanently reinvest the foreign cash amounts outside the U.S. The company's plans do not demonstrate a need to repatriate these balances to fund U.S. operations. During fiscal 2016, the company repatriated $0.7 million of foreign earnings. During fiscal years 2015 and 2014 the company did not repatriate any undistributed foreign earnings.

We believe cash on hand, cash generated from operations, and our borrowing capacity will provide adequate liquidity to fund near term and future business operations, capital needs, future dividends and share repurchases, subject to financing availability in the marketplace.

Contingencies
The company is involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such proceedings and litigation currently pending will not materially affect the company's Consolidated Financial Statements.

Basis of Presentation and Correction of Immaterial Error
The company's fiscal year ends on the Saturday closest to May 31. The fiscal years ended May 28, 2016 , May 30, 2015, and May 31, 2014 each contained 52 weeks of operations.

In the second quarter of fiscal 2016, the company made an adjustment to correct an immaterial error related to the accrual for product warranties. As a result of this correction, the company adjusted Accrued warranty, Other noncurrent assets (to capture the impact of adjusting deferred taxes), and Retained earnings by $12.5 million, $4.7 million, and $7.8 million, respectively. The adjustment impacts the Condensed Consolidated Balance Sheets as of May 30, 2015, the Condensed Consolidated Statement of Stockholders’ Equity as of May 31, 2014, Note 13 - Warranties, Guarantees, and Contingencies, and Note 14 - Operating Segments. This correction had no impact on earnings or cash flows.

- 34-



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 5 of the Consolidated Financial Statements. Additional information related to operating leases can be found in Note 6 of the Consolidated Financial Statements.
(In millions)
Payments due by fiscal year
 
Total
 
2017
 
2018-2019
 
2020-2021
 
Thereafter
Long-term debt 
221.9

 

 
149.9

 
72.0

 

Estimated interest on debt obligations (1)
30.5

 
12.9

 
12.3

 
5.3

 

Operating leases
318.0

 
38.9

 
72.7

 
59.2

 
147.2

Purchase obligations (2)
42.2

 
36.6

 
5.3

 
0.3

 

Pension plan funding (3)
1.1

 
0.5

 
0.1

 
0.1

 
0.4

Stockholder dividends (4)
8.8

 
8.8

 

 

 

Other (5)
20.6

 
1.8

 
3.7

 
4.3

 
10.8

Total
$
643.1

 
$
99.5

 
$
244.0