UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

þ		ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For Fiscal Year Ended June 3, 2006

Herman Miller, Inc.

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 þ No o

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 o No þ

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 þ No o

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. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The aggregate market value of the voting stock held by “nonaffiliates” of the registrant (for this purpose only, the affiliates of the registrant have been assumed to be the executive officers and directors of the registrant and their associates) as of December 3, 2005, was $2,064,847,871 (based on $30.71 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 31, 2006: Common stock, $.20 par value—65,272,823 shares outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the Registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on September 28, 2006, are incorporated into Part III of this report.

 

 

TABLE OF CONTENTS

		Page No.
Part I			3
Item 1 Business			3
Item 1A Risk Factors			6
Item 1B Unresolved Staff Comments			9
Item 2 Properties			9
Item 3 Legal Proceedings			10
Item 4 Submission of Matter to a Vote of Security Holders			10
Executive Officers of the Registrant			11
Part II
Item 5 Market for the Registrant’s Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities			12
Item 6 Selected Financial Data			14
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 7A Quantitative and Qualitative Disclosures about Market Risk			37
Item 8 Financial Statements and Supplementary Data			39
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosures			78
Item 9A Controls and Procedures			78
Item 9B Other Information			78
Part III			79
Item 10 Directors and Executive Officers of the Registrant			79
Item 11 Executive Compensation			79
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			79
Item 13 Certain Relationships and Related Transactions			80
Item 14 Principal Accounting Fees and Services			80
Part IV			81
Item 15 Exhibits and Financial Statement Schedule			81
Signatures			82
Report of Independent Registered Public Accounting Firm on Financial Statement Schedule			83
Schedule II Valuation and Qualifying Accounts			84
Exhibits			85
Fourth Amendment to the Herman Miller, Inc Profit Sharing & 401(K)
Second Amendment to the Intergrated Metal Technology, Inc. 401(K)
First Amendment to the Integrated Metal Technology, Inc Bargaining Unit Retirement Plan
Subsidiaries
Consent of Independent Registered Public Accounting Firm
Section 302 Certification of Chief Executive Officer
Section 302 Certification of Chief Financial Officer
Section 906 Certification of Chief Executive Officer
Section 906 Certification of Chief Financial Officer

PART 1

Item 1 BUSINESS

General Development of Business

The company researches, designs, manufactures and distributes interior furnishings, for use in various environments including office, healthcare, educational, and residential settings, and provides related services that support companies all over the world. The company’s products are sold primarily to or through independent contract office furniture dealers. Through research, the company seeks to define and clarify customer needs and problems existing in its markets and to design, through innovation where appropriate and feasible, products, systems, and services as solutions to such problems. Ultimately, the company seeks to assist its customers in creating great places.

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, majority-owned subsidiaries, and effective May 29, 2004, consolidated variable interest entities. Further information relating to principles of consolidation is provided in the Significant Accounting and Reporting Policies disclosure 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 the Operating Segments disclosure in Note 22 to the Consolidated Financial Statements included in Item 8 of this report.

Narrative Description of Business

The company’s principal business consists of the research, design, manufacture, and distribution of office furniture systems, products, and related services. Most of these systems and products are designed to be used together.

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

The company’s products are marketed worldwide by its own sales staff, its owned dealer network, independent dealers and retailers, and via the Internet. Salespersons work with dealers, the design and architectural community, as well as 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 69 percent of the company’s sales in the fiscal year ended June 3, 2006 were made to or through independent dealers. The remaining sales were made directly to end-users, including federal, state, and local governments, and several major corporations, by the company’s own sales staff, its owned dealer network, or independent retailers.

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

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

Raw Materials

The company’s manufacturing materials are available from a significant number of sources within the United States, Canada, Europe, and Asia. To date, the company has not experienced any difficulties in obtaining its raw materials. The costs of certain direct materials used in our manufacturing and assembly operations are sensitive to shifts in commodity market prices. In particular, the costs of steel components, plastics, and particleboard are sensitive to the market prices of commodities such as raw steel, aluminum, crude oil, lumber, and resins. Increases in the market prices for these commodities can have an adverse impact on our 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 approximately 243 active United States utility patents on various components used in its products and approximately 186 active United States design patents. Many of the inventions covered by the United States patents also have been patented in a number of foreign countries. Various trademarks, including the name and style “Herman Miller” and the “Herman Miller Circled Symbolic M” trademark are registered in the United States and many foreign countries. The company does not believe that any material part of its business depends on the continued availability of any one or all of its patents or trademarks, or that its business would be materially adversely affected by the loss of any thereof, except for Herman Miller^®, Herman Miller Circled Symbolic M^®, Geiger^®, Action Office^®, Ethospace^®, Aeron^®, Mirra^®, Eames^®, and PostureFit^®. It is estimated that the average remaining life of such patents and trademarks is approximately 6 years and 9 years, respectively.

Working Capital Practices

Information concerning the company’s inventory levels relative to its sales volume can be found under the Executive Overview section in Item 7 of this report. Beyond this discussion, the company does not believe that it or the industry in general has any special practices or special conditions affecting working capital items that are significant for understanding the company’s business.

Customer Base

It is estimated that no single dealer accounted for more than 4 percent of the company’s net sales in the fiscal year ended June 3, 2006. It is also estimated that the largest single end-user customer accounted for approximately 8 percent of the company’s net sales with the 10 largest customers accounting for approximately 18 percent of net sales. The company does not believe that its business depends on any single or small number of customers, the loss of which would have a materially adverse effect upon the company.

Backlog of Orders

As of June 3, 2006, the company’s backlog of unfilled orders was $238.2 million. At May 28, 2005, the company’s backlog totaled $228.6 million. It is expected that substantially all the orders forming the backlog at June 3, 2006, will be filled during the next fiscal year. Many orders received by the company are reflected in the backlog for only a short period while other orders specify delayed shipments and are carried in the backlog for up to one year. Accordingly, the amount of the backlog at any particular time does not necessarily indicate the level of net sales for a particular succeeding period.

Government Contracts

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

Competition

All aspects of the company’s business are highly competitive. The company competes largely on design, product and service quality, speed of delivery, and product pricing. Though the company is one of the largest office furniture manufacturers in the world, in several of the markets it competes with many smaller companies and with several manufacturers that have greater resources and sales.

Research, Design and Development

The company draws great competitive strength from its research, design and development programs. Accordingly, the company believes that its research and design activities are of significant importance. Through research, the company seeks to define and clarify customer needs and problems and to design, through innovation where feasible and appropriate, products and services as solutions to these customer needs and problems. The company uses both internal and independent research and design resources. Exclusive of royalty payments, the company spent approximately $34.3 million, $32.7 million, and $34.6 million, on research and development activities in fiscal 2006, 2005, and 2004, respectively. Generally, royalties are paid to designers of the company’s products as the products are sold and are not included in research and development costs since they are variable based on product sales.

Environmental Matters

The company continues to rigorously reduce, recycle, and reuse solid wastes generated by its manufacturing processes. Its accomplishments and these efforts have been widely recognized. The company does not believe, based on current facts known to management, that existing environmental laws and regulations have had or will have any material effect upon the capital expenditures, earnings, or competitive position of the company.

Human Resources

The company considers its employees to be another of its major competitive strengths. The company stresses individual employee participation and incentives, believing that this emphasis has helped attract and retain a competent and motivated workforce. The company’s human resources group provides employee recruitment, education and development, and compensation planning and counseling. There have been no work stoppages or labor disputes in the company’s history, and its relations with its employees are considered good. Approximately 6 percent of the company’s employees are covered by collective bargaining agreements, most of whom are employees of its Integrated Metal Technology, Inc., and Herman Miller Limited (U.K.) subsidiaries.

As of June 3, 2006, the company employed 6,054 full-time and 188 part-time employees, representing a 0.3 percent increase in full-time employees and a 5.5 percent decrease in part-time employees compared with May 28, 2005. In addition to its employee work force, the company uses temporary purchased labor to meet uneven demand in its manufacturing operations.

Information About International Operations

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

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

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

Additional information with respect to operations by geographic area appears in Note 22, Operating Segments, of the Notes to the Consolidated Financial Statements included in Item 8 of this report. Fluctuating exchange rates and factors beyond the control of the company, such as tariff and foreign economic policies, may affect future results of international operations. Refer to Item 7A, Quantitative and Qualitative Disclosures About Market Risk, for further discussion regarding the company’s foreign exchange risk.

Available Information

The company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are made available free of charge through the “Investors” section of the company’s internet website at www.hermanmiller.com, as soon as practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (SEC). The company’s filings with the SEC are also available for the public to read and copy in person at the SEC’s Public Reference Room at 100 F Street NE, Room 1024, Washington, DC 20549, by phone at 1-800-SEC-0330, or via their internet website at www.sec.gov.

Item 1A RISK FACTORS

The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones we face; others, either unforeseen or currently deemed less significant, may also have a negative impact on our company. If any of the following actually occurs, our business, operating results, cash flows, and financial condition could be materially adversely affected.

We may not be successful in implementing and managing our growth strategy.
We have established a set of key strategic goals for our business. Included among these are specific targets for growth in net sales and operating profit as a percentage of net sales. Our strategic plan assumes our growth targets will be achieved by pursuing and winning new business in the following areas:

	•		Primary Markets – Capturing additional market share within our primary markets by offering superior solutions to customers who value space as a strategic tool.
	•		Adjacent Markets – Further applying our core skills in space environments such as healthcare, higher education, and residential.

	•		Developing Economies – Expanding our geographic reach in areas of the world with significant growth potential.
	•		New Markets – Developing new products and technologies that serve wholly new markets.

While we have confidence that our strategic plan targets appropriate and achievable opportunities and anticipates and manages the associated risks, there is the possibility that the strategy may not deliver the projected results due to inadequate execution, incorrect assumptions, or changing customer requirements.

There is no assurance that our current product and service offering will allow us to meet these goals. Accordingly, we believe we will be required to continually invest in the research, design, and development of new products and services. There is no assurance that such investments will have commercially successful results.

Certain growth opportunities may require us to invest in acquisitions, alliances, and the startup of new business ventures. These investments may not perform according to plan.

Future efforts to expand our business within developing economies, particularly within China and India, may expose us to the effects of political and economic instability. Such instability may cause us difficulty in competing for business. It may also put at risk the availability and/or value of our capital investments within these regions.

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

The markets in which we operate are highly competitive, and we may not be successful in winning new business.

We are one of several companies competing for new business within the furniture industry. Many of our competitors offer similar categories of products, including office seating, systems and freestanding office furniture, casegoods, storage, and residential furniture solutions. We believe that our innovative product design, functionality, quality, depth of knowledge, and strong network of distribution partners differentiates us in the marketplace. However, increased market pricing pressure could make it difficult for us to win new business, at an acceptable profit margin, with certain customers and within certain market segments.

Additionally, in recent years we have seen an increased market presence from international competitors. We expect this to continue, particularly in the area of low-priced imports into the United States. There is a risk that this competitive pricing pressure could make it difficult for us to raise prices in response to increasing raw-material prices and other inflationary pressures.

Adverse economic and industry conditions could have a negative impact on our business, results of operations, and financial condition.

Customer demand within the contract office furniture industry is affected by various macro-economic factors; general corporate profitability, white-collar employment levels, new office construction rates, and existing office vacancy rates are among the most influential of these. History has shown that declines in these measures can have an adverse effect on overall office furniture demand. Additionally, factors and changes specific to our industry, such as developments in technology, governmental standards and regulations, and health and safety issues can influence demand. There is no assurance that current or future economic or industry conditions will not adversely affect our business, operating results, or financial condition.

Our business presence outside the United States exposes us to certain risks that could negatively affect our results of operations and financial condition.

We have a significant manufacturing and sales operation in the United Kingdom, which represents our largest marketplace outside the United States. In addition to this, our products are sold internationally through wholly-owned subsidiaries or branches in various countries including Canada, Mexico, France, Germany, Italy, Netherlands, Japan, Australia, Singapore, China, and India. In certain other regions of the world, our products are offered through independent dealerships and licensees.

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

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

Disruptions in the supply of raw and component materials could adversely affect our manufacturing and assembly operations.

We rely on outside suppliers to provide on-time shipments of the various raw materials and component parts used in our manufacturing and assembly processes. The timeliness of these deliveries is critical to our ability to meet customer demand. Any disruptions in this flow of delivery could have a negative impact on our business, results of operations, and financial condition.

Increases in the market prices of manufacturing materials may negatively affect our profitability.

The costs of certain manufacturing materials used in our operations are sensitive to shifts in commodity market prices. In particular, the costs of steel components, plastics, particleboard, and aluminum components are sensitive to the market prices of commodities such as raw steel and aluminum, crude oil, lumber, and resins. Increases in the market prices of these commodities may have an adverse impact on our profitability if we are unable to offset them with strategic sourcing and continuous improvement initiatives or, as a result of competitive market conditions, we are unable to increase prices to our customers.

Disruptions within our dealer network could adversely affect our business.

Our ability to manage existing relationships with 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 our overall business, our business within a given market could be negatively affected by disruptions in our dealer network caused by the termination of our commercial working relationships, ownership transitions, or dealer financial difficulties.

If dealers go out of business or restructure, we may suffer losses because they may not be able to pay for products already delivered to them. Also, dealers may experience financial difficulties, creating the need for outside financial support, which may not be easily obtained. In the past, we have, on occasion, agreed to provide direct financial assistance through term loans, lines of credit, and/or loan guarantees to certain dealers. There is no assurance that these dealers will be able to repay amounts owed to us or to banks with which we have offered guarantees.

Increasing competition for highly skilled and talented workers could adversely affect our business.

The successful implementation of our business strategy will depend, in part, on our ability to attract and retain a skilled workforce. The increasing competition for highly skilled and talented employees could result in higher compensation costs, difficulties in maintaining a capable workforce, and leadership succession planning challenges.

Costs related to product defects could adversely affect our profitability.

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

Item 1B UNRESOLVED STAFF COMMENTS – N/A

Item 2 PROPERTIES

The company owns or leases facilities located throughout the United States and several foreign countries. The location, square footage, and use of the most significant facilities at June 3, 2006, were as follows.

		Square
		Footage				Use
Owned Locations:
Holland, Michigan			917,400			Manufacturing, Distribution, Warehouse, Design, Office
Spring Lake, Michigan			818,300			Manufacturing, Warehouse, Office
Zeeland, Michigan			750,800			Manufacturing, Warehouse, Office
Canton, Georgia (1)			327,800			Manufacturing, Warehouse
England, U.K.			76,200			Manufacturing, Office
Leased Locations:
Zeeland, Michigan			98,100			Office
Atlanta, Georgia			176,700			Manufacturing, Warehouse, Office
England, U.K.			92,800			Manufacturing, Warehouse

In addition to the above, the company has a leased facility in Zeeland, Michigan with approximately 218,300 square feet that has been exited and is subleased to a third party. The company also maintains showrooms or sales offices near most major metropolitan areas throughout North America, Europe, Asia/Pacific, and Latin America. The company considers its existing facilities to be in excellent condition, efficiently utilized, well suited, and adequate for its design, production, distribution, and selling requirements.

Item 3 LEGAL PROCEEDINGS

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

As previously reported, the company has received a subpoena from the New York Attorney General’s office requesting certain information relating to the minimum advertised price program maintained by the Herman Miller for the Home division. In connection with this matter, the New York Attorney General’s office has taken depositions of current and former employees of the company and certain dealers. The company and the New York Attorney General’s office have had preliminary discussions regarding possible methods of resolving the matter. The company has reserved its best estimate of a potential amount to resolve this matter. The accrued amount is not material to the company’s consolidated financial position.

Item 4 SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth quarter of the year ended June 3, 2006.

ADDITIONAL ITEM: EXECUTIVE OFFICERS OF THE REGISTRANT

Certain information relating to Executive Officers of the company is as follows.

						Year Elected an				Position with
Name		Age				Executive Officer				the Company
James E. Christenson			59				1989			Senior Vice President, Legal Services, and Secretary
Donald D. Goeman			49				2005			Executive Vice President, Research, Design & Development
Kenneth L. Goodson, Jr.			54				2003			Executive Vice President, Operations
Andrew J. Lock			52				2003			Executive Vice President, Chief Administrative Officer
Kristen L. Manos			47				2003			Executive Vice President, North American Office Learning Environments
Gary S. Miller			56				1984			Executive Vice President, Creative Office
Elizabeth A. Nickels			44				2000			Executive Vice President, Chief Financial Officer
Joseph M. Nowicki			44				2003			Treasurer and Vice President, Investor Relations
John P. Portlock			60				2003			President, International
Michael A. Volkema			50				1995			Chairman
Charles J. Vranian			56				2003			Executive Vice President, North American Emerging Markets
Brian C. Walker			44				1996			President and Chief Executive Officer

Except as discussed in this paragraph, each of the named officers has served the company in an executive capacity for more than eight years. Mr. Goeman joined Herman Miller’s New Product Development arena in 1980, and during his 27 years with the company he has held a variety of new product design and development leadership positions. Mr. Goodson was Senior Vice President of the company’s seating procurement groups from 1997 to 2001, President of Herman Miller’s Integrated Metal Technology, Miltech, and Powder Coat Technologies subsidiaries from 1990 to 1997, and Director of Operations at one of the company’s West Michigan facilities from 1987 to 1990. Mr. Lock was Senior Vice President for People Services from 2000 to 2003, Vice President for Integration from 1998 to 2000, and Vice President of International Human Resources from 1997 to 1998. Ms. Manos joined Herman Miller in 2002 and prior to this, she served as Vice President of Global Marketing and Global Product Marketing & Development at Haworth, Inc. for five years. Ms. Nickels joined Herman Miller in 2000 and prior to this was Chief Financial Officer of Universal Forest Products, Inc., for seven years. Mr. Nowicki was the Vice President of Finance for International Operations from 2000 to 2003; before this, he served in various financial functions within the company. Mr. Portlock was President of European Operations from 2000 to 2002, President of Northern European Operations from 1997 to 2000, U.K. Managing Director of Operations from 1993 to 1997, and U.K. Sales and Marketing Director from 1989 to 1993. Mr. Vranian was Vice President of Product Management and Marketing from 1998 to 2001, Vice President of Design, Development, and Marketing for Miller SQA from 1995 to 1998; prior to this, he served in various product development, marketing and finance roles within the company.

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.

PART II

Item 5 MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

Herman Miller, Inc., common stock is traded on the NASDAQ-Global Select Market System (Symbol: MLHR). As of July 31, 2006, there were approximately 16,500 shareholders of record of the company’s common stock.

		Market				Market
		Price				Price				Market				Earnings				Dividends
		High				Low				Price				Per Share-				Declared Per
Per Share and Unaudited		(at close)				(at close)				Close				Diluted				Share
Year Ended June 3, 2006
First quarter		$	32.91			$	28.68			$	29.25			$	0.34			$	0.07250
Second quarter			30.83				26.88				30.71				0.40				0.07250
Third quarter			31.44				28.19				30.61				0.33				0.08000
Fourth quarter			32.54				29.14				30.34				0.38				0.08000
Year		$	32.91			$	26.88			$	30.34			$	1.45			$	0.30500
Year Ended May 28, 2005
First quarter		$	28.94			$	24.25			$	25.40			$	0.20			$	0.07250
Second quarter			25.74				22.40				25.02				0.22				0.07250
Third quarter			29.01				23.88				29.01				0.24				0.07250
Fourth quarter			31.60				27.94				29.80				0.31				0.07250
Year		$	31.60			$	22.40			$	29.80			$	0.96			$	0.29000

Dividends were declared and paid quarterly during fiscal 2006 and 2005 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 June 3, 2006.

										(c) Total Number of				(d) Maximum Number (or
		(a) Total								Shares (or Units)				Approximate Dollar
		Number of				(b) Average				Purchased as Part				Value) of Shares (or
		Shares (or				price Paid				of Publicly				Units) that May Yet be
		Units)				per Share or				Announced Plans				Purchased Under the
Period		Purchased(1)				Unit				or Programs				Plans or Programs
3/5/06-4/1/06			104,656			$	31.58				104,656			$	121,247,240
4/2/06-4/29/06			252,985				31.56				252,985				113,263,893
4/30/06-6/3/06			338,743				30.31				338,743				102,995,270
Total			696,384			$	30.96				696,384			$	102,995,270

The company repurchases shares under a previously announced plan authorized by the Board of Directors as follows.

•

Plan announced on January 26, 2006, providing share repurchase authorization of $150,000,000 with no specified expiration date.

No repurchase plans expired or were terminated during the fourth quarter of fiscal 2006, nor do any plans exist under which the company does not intend to make further purchases.

During the period covered by this report the company did not sell any of its equity shares that were not issued under the Securities Act of 1933.

Item 6 SELECTED FINANCIAL DATA

Review of Operations

(In Millions,
Except Key Ratios and Per Share Data)		2006				2005				2004				2003				2002
Operating Results
Net Sales (3)		$	1,737.2			$	1,515.6			$	1,338.3			$	1,336.5			$	1,468.7
Gross Margin (3)			574.8				489.8				415.6				423.6				440.3
Selling, General, and Administrative (3)			373.6				326.7				304.1				319.8				399.7
Design and Research			43.0				40.2				40.0				39.1				38.9
Operating Earnings			157.7				121.9				61.2				48.3				(79.9	)
Earnings Before Income Taxes			147.6				112.8				51.6				35.8				(91.0	)
Net Earnings			99.2				68.0				42.3				23.3				(56.0	)
Cash Flow from Operating Activities			150.4				109.3				82.7				144.7				54.6
Depreciation and Amortization			41.6				46.9				59.3				69.4				112.9
Capital Expenditures			50.8				34.9				26.7				29.0				52.4
Common Stock Repurchased plus Cash Dividends Paid			175.4				152.0				72.6				72.7				30.3
Key Ratios
Sales Growth (Decline) (3)			14.6	%			13.2	%			0.1	%			(9.0	)%			(34.3	)%
Gross Margin (1), (3)			33.1				32.3				31.1				31.7				30.0
Selling, General, and Administrative (1), (3)			21.5				21.6				22.7				23.9				27.3
Design and Research Expense (1), (3)			2.5				2.7				3.0				2.9				2.6
Operating Earnings (1), (3)			9.1				8.0				4.6				3.6				(5.4	)
Net Earnings Growth (Decline)			45.9				60.8				81.5				141.6				(139.8	)
After-Tax Return on Net Sales (3), (5)			5.7				4.5				3.2				1.7				(3.8	)
After-Tax Return on Average Assets (6)			14.4				9.6				5.7				3.0				(6.3	)
After-Tax Return on Average Equity (7)			64.2				37.3				21.9				10.3				(18.2	)
Share and Per Share Data (2)
Earnings per Share-Diluted		$	1.45			$	.96			$	.58			$	.31			$	(.74	)
Cash Dividends Declared per Share			.31				.29				.18				.15				.15
Book Value per Share at Year End			2.10				2.45				2.71				2.62				3.45
Market Price per Share at Year End			30.34				29.80				24.08				19.34				23.46
Weighted Average Shares Outstanding- Diluted			68.5				70.8				73.1				74.5				75.9
Financial Condition
Total Assets (9)		$	668.0			$	707.8			$	714.7			$	757.3			$	788.0
Working Capital (4)			93.8				162.3				207.8				189.9				188.7
Current Ratio			1.3				1.5				1.8				1.7				1.8
Interest-Bearing Debt			178.8				194.0				207.2				223.0				235.1
Shareholders’ Equity			138.4				170.5				194.6				191.0				263.0
Total Capital (8)			317.2				364.5				401.8				414.0				498.1

		2001				2000				1999				1998				1997				1996
		$	2,236.2			$	2,010.2			$	1,828.4			$	1,773.0			$	1,543.8			$	1,325.0
			755.7				680.4				641.6				613.0				509.5				418.4
			475.4				404.4				379.3				370.9				335.2				299.5
			44.3				41.3				38.0				33.8				29.1				27.5
			236.0				234.7				224.3				208.3				130.7				74.9
			225.1				221.8				229.9				209.5				125.9				70.1
			140.6				139.7				141.8				128.3				74.4				45.9
			211.8				202.1				205.6				268.7				218.2				124.5
			92.6				77.1				62.1				50.7				48.0				45.0
			105.0				135.7				103.4				73.6				54.5				54.4
			105.3				101.6				179.7				215.5				110.4				38.1
			11.2	%			9.9	%			3.1	%			14.8	%			16.5	%			18.5	%
			33.8				33.8				35.1				34.6				33.0				31.6
			21.3				20.1				20.7				20.9				21.7				22.6
			2.0				2.1				2.1				1.9				1.9				2.1
			10.6				11.7				12.3				11.7				8.5				5.7
			0.6				(1.5	)			10.5				72.4				62.1				967.4
			6.3				6.9				7.8				7.2				4.8				3.5
			14.5				16.5				18.5				16.7				10.3				6.8
			43.5				55.5				64.4				49.5				25.0				15.4
		$	1.81			$	1.74			$	1.67			$	1.39			$	.77			$	.46
			.15				.15				.15				.15				.13				.13
			4.63				3.76				2.63				2.66				3.12				3.12
			26.90				29.75				20.19				27.69				17.88				7.72
			77.6				80.5				84.8				92.0				96.1				100.5
		$	996.5			$	941.2			$	751.5			$	784.3			$	755.6			$	694.9
			191.6				99.1				55.5				77.2				135.7				151.8
			1.5				.9				1.0				1.1				1.4				1.6
			259.3				225.6				147.6				130.7				127.4				131.7
			351.5				294.5				209.1				231.0				287.1				308.1
			610.8				520.1				356.7				361.7				414.5				439.8

Item 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis

You should read the issues discussed in Management’s Discussion and Analysis in conjunction with the company’s consolidated financial statements and the notes to the consolidated financial statements included in this Form 10-K.

Executive Overview

Herman Miller uses problem-solving design and innovation to create great places to work, heal, live, and learn for our customers. We do this by providing high quality products and related knowledge services. At present, most of our customers come to us for work environments. Our primary products include furniture systems, seating, storage and material handling solutions, freestanding furniture, and casegoods. Our services extend from workplace and real estate strategy to furniture asset management.

Our primary domestic manufacturing operations are located in Michigan and Georgia. We also have a significant manufacturing presence in the United Kingdom, which represents our largest marketplace outside the United States. In addition to sales in the United Kingdom, our products are sold internationally through wholly-owned subsidiaries or branches in various countries including Canada, France, Germany, Italy, Japan, Mexico, Australia, Singapore, China, India, and the Netherlands. Our products are offered elsewhere in the world primarily through independent dealerships and licensees.

We manufacture our products using a system of lean manufacturing techniques collectively referred to as the Herman Miller Production System (HMPS). We strive to maintain efficiencies and cost savings by minimizing the amount of inventory on hand. Accordingly, production is order-driven with direct materials and components purchased as needed to meet demand. The standard lead time for the majority of our products is 10 to 20 days. As a result, the rate of our inventory turns is high. These combined factors could cause our inventory levels to appear relatively low in relation to sales volume.

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

Our business is comprised of various operating segments as defined by generally accepted accounting principles. These operating segments are determined on the basis of how we internally report and evaluate financial information used to make operating decisions. The operating segments are organized by the various markets we serve, including traditional office, healthcare, and educational environments in North America. Other primary operating segments include the office furniture market outside North America as well as the North American residential furniture market. For external reporting purposes, we aggregate these operating segments as follows.

	•		North American Furniture Solutions – Includes the business associated with the design, manufacture, and sale of furniture products for office, healthcare, and educational environments, throughout the United States, Canada, and Mexico.
	•		Non-North American Furniture Solutions – Includes the business associated with the design, manufacture, and sale of furniture products, primarily for work-related settings, outside North America.
	•		Other – Includes our North American residential furniture business as well as other business activities such as our startup businesses associated with the Herman Miller Creative Office, variable interest entities, and unallocated corporate expenses.

Core Strengths

We rely on the following core strengths in delivering workplace solutions to our customers.

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

Channels of Distribution

Our products and services are offered to most of our customers under standard trade credit terms of between 30 and 45 days and are sold through the following distribution channels.

	•		Independent Contract Furniture Dealers and Licensees – Most of our product sales are made to a network of independently owned and operated contract furniture dealerships doing business in many countries around the world. These dealers purchase our products and distribute them to end customers. We recognize revenue on product sales through this channel once our products are shipped and title passes to the dealer. Many of these dealers also offer furniture-related services including product installation.
	•		Owned Contract Furniture Dealers – At June 3, 2006, we owned 9 contract furniture dealerships, some of which have operations in multiple locations. The financial results of these owned dealers are included in our consolidated financial statements. Product sales to these dealerships are eliminated as inter-company transactions from our consolidated financial results. We recognize revenue on these sales once products are shipped to the end customer and installation is substantially complete.
	•		Direct Customer Sales – We sometimes sell products and services directly to end customers without an intermediary (i.e., sales to the U.S. federal government). In most of these instances, we contract separately with a dealership or third-party installation company to provide sales-related services. We recognize revenue on these sales once products are shipped and installation is substantially complete.
	•		Independent Retailers – Certain products are sold to end customers through independent retail operations. Revenue is recognized on these sales once products are shipped and title passes to the independent retailer.

We believe independent ownership of contract furniture dealers is, on balance, the best model for a financially strong distribution network. With this in mind, our strategy is to continue to pursue opportunities to transition our owned dealerships to independent owners. Where possible, our goal is to involve local managers in these ownership transitions.

Challenges Ahead

Like all businesses, we are faced with a host of challenges and risks. We believe our core strengths and values, which provide the foundation for our strategic direction, have us well prepared to respond to the inevitable challenges we will face in the future. While we are confident in our direction, we believe it prudent to acknowledge and remain mindful of the risks specific to our business and industry. Refer to Item 1A of our Annual Report on Form 10-K for discussion of certain of these risk factors.

Future Avenues of Growth

We believe we are well positioned to successfully pursue our mission despite the risks and challenges we face. That is, we believe we can continue to invent solutions that create great places. In pursuing our mission, we have identified the following as key avenues for our future growth.

•

Primary Markets – Capturing additional market share within our existing primary markets by offering superior solutions to customers who value space as a strategic tool

	•		Adjacent Markets – Further applying our core skills in environments such as healthcare, higher education, and residential
	•		Developing Economies – Expanding our geographic reach in areas of the world with significant growth potential
	•		New Markets – Developing new products and technologies that serve wholly new markets

Industry Performance

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

Discussion of Business Conditions

Our fiscal year ended June 3, 2006, included 53 weeks of operations as opposed to a typical 52-week period. This extra week is required approximately every six years in order to realign our fiscal reporting dates with the actual calendar months. This is a factor that should be considered when comparing our financial results in fiscal 2006 to fiscal years 2005 and 2004.

We made meaningful progress toward our long-term strategic objectives during fiscal 2006. Our second consecutive year of double-digit sales growth moved us closer to our goal of doubling net sales between fiscal years 2004 and 2010. We added innovative new products to our portfolio with the introduction of two new systems furniture platforms, a new executive chair, and an innovative task light. We further expanded our presence in the healthcare and educational markets through the establishment of alliances with Brandrud, Inc., and Bretford, Inc. We laid the foundation of our planned expansion into mainland China by establishing our legal trading structure, obtaining showroom space in Shanghai, and expanding our network of independent dealers. We were also very excited to be recognized, once again, by Fortune magazine as the “Most Admired” company in the contract furniture industry. The publication ranked us first in our industry in innovation, employee talent, social responsibility, and quality of products.

Market demand in the domestic contract furniture industry was strong throughout the fiscal year, bolstered by the general health of the economy. In May, BIFMA issued its updated industry forecast. The report outlined the general expectation that office furniture consumption would continue to grow through the second half of calendar year 2006 and through calendar 2007, though at a more moderate level. Specifically, the forecast cited a rebound in nonresidential construction, falling office vacancy rates, and record-high corporate profits as factors driving the improved industry conditions. Growing employment rates have also had a positive impact on this trend; however, the employment growth rate is forecast to slow in the second half of calendar 2006 and into 2007.

Similar to what we saw in fiscal years 2004 and 2005, increasing market prices for key manufacturing commodities posed a challenge to our profitability this past year. We were encouraged to see price stabilization in the steel market during the current year. However, this good news was more than offset by increases in other commodities. Oil and natural gas prices increased early in the year, particularly after the hurricanes in the Gulf region. These increases had an immediate effect on our transportation and manufacturing process costs. This was followed by increases in the price of petroleum-based products such as plastics and resins. We also saw a ramp-up in the price of aluminum and particleboard, particularly in the second half of the fiscal year. We continue to closely monitor the markets for all of our key manufacturing materials and view the prospect of further increases as an outlook risk to the business.

These rising material costs have prompted us to raise our product prices twice since the beginning of fiscal 2005. The first increase, which became effective in August 2004, varied by product line but averaged approximately 4 percent of list price. In September 2005, just after the end of our first quarter, we implemented another price increase. This increase again varied by product line but averaged approximately

3.8 percent of list price. While the markets in which we do business are highly price-competitive, we were pleased by the degree to which these price increases were accepted in the marketplace. These price increases have, to a large extent, allowed us to absorb the negative impact of rising commodity costs. Given the competitive nature of discounting in our industry, these price increases may not fully offset the impact of rising material costs in the future. However, we continue to believe we can cover a large portion of these cost increases through the combination of our pricing strategy and HMPS.

Part of our strategy in addressing competitive pricing pressure is to differentiate ourselves through design and innovation. Our goal is to demonstrate to our customers that price is but one of several important factors to consider in the buying decision. With this in mind, we continue to vigorously pursue new product development initiatives. We incurred design and research expenses, including royalty payments to independent designers, of $43.0 million in fiscal year 2006.

This level of investment over the past three years has resulted in the introduction of several new products. In June 2004 we introduced a redesign of Abak™ —a freestanding desk system. We then introduced the Celle™ chair and Babble™ technology. Following the Best of NeoCon Innovation Award for 2005, Celle was awarded the National Ergonomics Conference and Exposition People’s Choice Award and was named as a 2005 Editors’ Choice by Buildings magazine. Babble, a voice privacy technology, won several awards over the past year, including a Best of Innovations Award at the 2006 Consumer Electronics Show. Babble was also named Innovation of the Year by the New York Times.

We were also pleased with the recognition our new products received at the NeoCon trade show this past June. Our product introductions in June 2006 included two systems furniture platforms — My Studio Environments^TM and Vivo^TM Interiors. The Foray^TM chair, an executive task chair made by Geiger, and Leaf^TM, an innovative LED desk lamp, were also presented at the show. My Studio Environments received a Gold Award as well as the coveted Best of Competition honors. Leaf received the Gold Award in the lighting category and Foray received Silver for ergonomic task seating. In addition to this new product recognition, we received the Manufacturer of the Year award from the Office Furniture Dealer Alliance.

Financial Results

The following is a comparison of our annual results of operations and year-over-year percentage changes for the periods indicated.

						% Chg								% Chg
(Dollars In Millions)		Fiscal 2006				from 2005				Fiscal 2005				from 2004				Fiscal 2004
Net Sales		$	1,737.2				14.6	%		$	1,515.6				13.2	%		$	1,338.3
Cost of Sales			1,162.4				13.3	%			1,025.8				11.2	%			922.7
Gross Margin			574.8				17.4	%			489.8				17.9	%			415.6
Operating Expenses (1)			416.6				13.5	%			366.9				6.6	%			344.1
Restructuring Expenses			0.5				(50.0	)%			1.0				(90.3	)%			10.3
Operating Earnings			157.7				29.4	%			121.9				99.2	%			61.2
Net Other Expenses			10.1				11.0	%			9.1				(5.2	)%			9.6
Earnings Before Income Taxes			147.6				30.9	%			112.8				118.6	%			51.6
Income Tax Expense			47.7				6.7	%			44.7				408.0	%			8.8
Minority Interest, net of tax			0.7				600.0	%			0.1			NA					—
Cumulative Effect of Accounting Change, net			—			NA					—			NA					0.5
Net Earnings		$	99.2				45.9	%		$	68.0				60.8	%		$	42.3

Fiscal 2006 Compared to Fiscal 2005

Consolidated net sales for fiscal 2006 totaled $1,737.2 million, which represents a year-over-year increase of 14.6 percent. The additional week in fiscal 2006 added approximately $31 million in net sales to the period. Excluding the impact of this extra week of operations, the year-over-year growth in net sales totaled approximately 12.6 percent. This increase was driven by gains in both our North American and Non-North American Furniture Solutions business segments.

Throughout fiscal 2006 we continued to be affected by market pricing pressures in the form of year-over-year increases in the level of price discounting. However, this was more than offset by benefits from the general price increases put in place since August 2004. It is difficult to quantify with certainty the year-over-year benefit to our total net sales; however, our best estimate is that we were able to capture approximately 25 to 35 percent of the price increases, net of discounting, in both fiscal years 2006 and 2005.

Consolidated net trade orders in fiscal 2006 of $1,765.7 million increased 15.1 percent over the prior year. Excluding the extra week of operations in the current year, order growth between fiscal 2006 and 2005 totaled approximately 12.8 percent. On a weekly average basis, new orders in fiscal year 2006 approximated $33.3 million, an amount that slightly outpaced net sales. Our average weekly order pacing in the current year declined slightly between the first half and second half of the year, reflecting traditional seasonality driven in part by the timing of the federal government fiscal year and the December holiday season. The backlog of unfilled orders at the end of fiscal 2006 totaled $238.2 million, which represents an increase of 4.2 percent from the prior year level of $228.6 million.

During the first quarter of fiscal 2006, we completed the sale of two wholly-owned contract furniture dealerships – one based in New York City, New York, and another in Cleveland, Ohio. Another first quarter development involved an independently-owned dealership that we began consolidating as a Variable Interest Entity (VIE) under Financial Accounting Standards Board Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46(R)) at the end of fiscal 2004. Due to the dealership’s improved financial condition, the owners were successful in obtaining outside bank financing. This allowed them to repay a large portion of their outstanding loan balance with us. As a result, we were no longer required to include this VIE in our consolidated financial statements after the first quarter.

These dealership transitions affect our year-over-year comparisons. We estimate that net sales from these dealers totaled approximately $42.7 million in fiscal 2005, while net sales from such dealers in the first quarter of the current fiscal year, before the transitions, totaled $10.7 million. Net trade orders from these dealerships totaled approximately $47.6 million in fiscal 2005 compared to only $14.4 million in the current year. Our ending backlog for fiscal 2005 included approximately $16.4 million related to these dealers.

BIFMA reported an estimated year-over-year increase in U.S. office furniture shipments of approximately 10.3 percent and orders of 11.7 percent for the twelve-month period ended May 2006. By comparison, net sales and order growth for our domestic U.S. business totaled approximately 12.7 percent and 12.8 percent, respectively. It is important to note that these growth percentages, both for our domestic U.S. business as well as the BIFMA amounts, include the impact of our extra week of operations in fiscal 2006 and the year-to-year impact of the dealership transitions discussed above. Taking these factors into consideration, we believe our net sales and order performance in fiscal 2006 indicates that we have been successful in capturing domestic U.S. market share.

Fiscal 2005 Compared to Fiscal 2004

Consolidated net sales in fiscal 2005 of $1,515.6 million increased 13.2 percent from sales of $1,338.3 million in fiscal 2004. This growth occurred across the majority of our operations and was especially strong in our Non-North American Furniture Solutions segment where we posted a 23.8 percent increase. In particular, net sales growth in the United Kingdom, Australia, and Singapore was a highlight in fiscal 2005.

Net trade orders in fiscal 2005 of $1,534.7 million increased 13.4 percent over our fiscal 2004 level of $1,353.4 million. During fiscal 2005, we saw a similar seasonal trend in weekly order pacing as we experienced in the current fiscal year. Our ending backlog for fiscal 2005 was approximately 9.1 percent higher than the fiscal 2004 level.

The adoption of FIN 46(R) as of May 29, 2004, affected the year-over-year comparison of net sales and orders between fiscal years 2005 and 2004. In connection with the adoption, we began consolidating two variable interest entities (VIEs), which increased our fiscal 2005 net sales and orders by approximately $13.2 million and $16.6 million, respectively.

Discussion of Business Segments

Business in our North American Furniture Solutions segment remained strong throughout fiscal 2006. Net sales for this segment totaled $1,448.0 million, compared to $1,262.8 million in fiscal 2005. This represents a 14.7 percent increase in net sales. We experienced growth, to varying degrees, across the entire segment, with the largest gains coming from our core office environment and healthcare businesses.

We posted net sales in our Non-North American Furniture Solutions segment of $216.9 million in fiscal 2006. The year-over-year increase in net sales within this segment totaled 13.3 percent, much of it driven by business in the United Kingdom, continental Europe, Australia, and Brazil. We achieved these increases despite downward pressure from currency exchange rates relative to the prior year. In particular, our year-over-year net sales comparison in this segment was affected by the strengthening of the U.S. dollar relative to the British Pound Sterling, Euro, and Japanese Yen. We estimate the change in currency exchange rates between fiscal years 2005 and 2006 effectively decreased the U.S. dollar-value of net sales in our Non-North American Furniture Solutions segment by approximately $8 million in fiscal 2006.

On a consolidated basis, changes in foreign currency exchange rates relative to the U.S. dollar had a minimal effect on our net sales in fiscal 2006. This is because the adverse exchange rate movements within our Non-North American markets were offset, in large part, by the weakening of the U.S. dollar against the Canadian dollar. We estimate the year-over-year change in exchange rates effectively decreased the U.S. dollar-value of our consolidated net sales by approximately $0.1 million for fiscal 2006. By comparison, we estimate the change in exchange rates between fiscal years 2004 and 2005 had the opposite impact, effectively increasing the U.S. dollar-value of our fiscal 2005 consolidated net sales by approximately $11 million. This was primarily due to the weakening of the U.S. dollar against the British Pound. It is important to note that period-to-period changes in currency exchange rates have a directionally similar impact on our international cost structures.

The remainder of our report within Management’s Discussion and Analysis focuses on what we believe to be the most significant factors affecting our consolidated financial results, without specific reference to the impact within individual business segments. We believe discussion at this level provides the most meaningful basis for understanding the key drivers of our business performance. Refer to Note 22 for further information regarding the financial performance of our business segments in fiscal years 2006, 2005, and 2004.

Percent of Net Sales Analysis

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

		Fiscal Year Ended
		June 3, 2006				May 28, 2005				May 29, 2004
Net Sales			100.0	%			100.0	%			100.0	%
Cost of Sales			66.9				67.7				68.9
Gross Margin			33.1				32.3				31.1
Selling, General, and Administrative Expenses (SG&A)			21.5				21.6				22.7
Design and Research Expenses			2.5				2.7				3.0
Restructuring Expenses			—				0.1				0.8
Total Operating Expenses			24.0				24.3				26.5
Operating Earnings			9.1				8.0				4.6
Net Other Expenses			0.6				0.6				0.7
Earnings Before Income Taxes			8.5				7.4				3.9
Income Tax Expense			2.7				2.9				0.7
Minority Interest, net of tax (2)			—				—				NA
Cumulative Effect of Accounting Change, net (3)			NA				NA				—
Net Earnings			5.7	%			4.5	%			3.2	%

Gross Margin

Fiscal 2006 Compared to Fiscal 2005

Our current year gross margin of 33.1 percent was our highest since fiscal year 2001. On a percent-of-sales basis, our gross margin for fiscal 2006 improved 0.8 points from the comparable period in the prior year. This year-over-year increase was primarily due to the benefits of better realization on price increases and improvements in overhead and direct labor. However, these favorable factors were partially offset by higher material costs and freight costs.

Overhead, as a percentage of sales, improved significantly from the prior year due to leverage gained on higher sales volume, despite an increase in actual dollar spending. This rise in spending was primarily the result of an increase in medical benefit costs, pension expenses, incentive compensation expenses, utility costs, and other items that vary with sales volume. Specifically, the combined expenses related to pension and incentive compensation for fiscal 2006 increased $10.2 million over last year.

Direct labor, as a percentage of sales, also improved over the prior year as a result of operational efficiencies and leverage gained on higher production levels.

During the current year we experienced substantial cost increases for certain key manufacturing materials such as aluminum, plastics, and particleboard. Despite this, material costs as a percentage of net sales increased only slightly from our fiscal 2005 level due to the net benefit realized from price increases during the year. Steel prices, which have negatively affected our gross margin performance in recent years, stabilized during the current year and, in fact, improved slightly. Consequently, the year-over-year impact of steel costs in fiscal 2006 was relatively minimal. Still, the prospect of future increases in the price of critical manufacturing inputs remains a concern. We continue to believe our lean manufacturing efforts in connection with HMPS, combined with our pricing strategy, will allow us to cover a large portion of potential future price increases in direct material costs.

Freight costs, as a percentage of sales, increased 0.5 percentage points in fiscal 2006 due to higher fuel prices and increased shipments to higher-cost freight zones.

Fiscal 2005 Compared to Fiscal 2004

The 1.2 percentage point improvement in gross margin between fiscal years 2004 and 2005 was driven primarily by improved fixed cost leverage resulting from the significant increase in net sales over the prior year. This increase in net sales was bolstered in part by our August 2004 price increase. Additionally, during fiscal 2005 we benefited from a full year of the operating efficiencies gained from our restructuring plan. This resulted in a notable reduction in direct labor and manufacturing overhead expenses as measured on a percent of sales basis. These improvements were achieved despite year-over-year increases in direct material costs, a $9 million increase in incentive compensation expenses, and increased competitive pricing pressure compared to fiscal 2004.

Direct material costs increased in fiscal 2005 on both a dollar and percent-of-sales basis. We experienced significant direct material price increases during fiscal 2005, particularly in the area of steel components. We estimate the increased market price of steel alone reduced our fiscal 2005 consolidated gross margin, as a percent of net sales, by as much as 1.3 percentage points.

During the fourth quarter of fiscal 2004 we began realizing the labor and overhead cost benefits of consolidating our Canton, Georgia, operation into existing space in West Michigan. These benefits continued through the following year and, as a result, our fiscal 2005 direct labor costs as a percent of net sales were comparatively lower.

Operating Expenses and Operating Earnings

Fiscal 2006 Compared to Fiscal 2005

As a percentage of net sales, operating expenses in fiscal 2006 declined 0.3 points due to improved operating leverage on higher sales volume. Total dollar spending in fiscal 2006 was, however, significantly above our fiscal 2005 level. Operating expenses of $417.1 million in the current year increased $49.2 million from the fiscal 2005 amount of $367.9 million.

During the fourth quarter of fiscal 2005 we recorded a significant reserve adjustment, which resulted in a reduction to our fiscal 2005 operating expenses. In April 2005, we reported that we had reached a settlement with the General Services Administration (GSA) concerning a prior audit of the 1988 to 1991 multiple award schedule contract. In light of the settlement, which required us to pay the GSA $0.5 million, we reevaluated our balance sheet reserves related to all GSA contract periods. As a result of this evaluation, we made the determination that these reserves should be reduced. Accordingly, during the fourth quarter of fiscal 2005, we recorded an adjustment to the reserves, which reduced our pre-tax operating expenses by approximately $13.0 million. Approximately $7.0 million of this adjustment related to the elimination of the remaining reserves, beyond the amount of the settlement, allocable to the 1988 to 1991 contract period. The remainder of the adjustment related to our reevaluation of required reserves for open contract periods that had not yet been subject to audit.

The dealership transitions that occurred in the first quarter of this year also had a significant impact on the year-over-year operating expense comparison. Operating expenses incurred by these dealers in the prior year totaled $14.7 million, while operating expenses incurred by such dealers in the first quarter of the current year, before the transitions, totaled only $2.4 million.

Excluding the comparative impact of the dealership transitions and fiscal 2005 GSA reserve adjustment, operating expenses in fiscal 2006 were approximately $48.5 million higher than in fiscal 2005.

The majority of this year-over-year increase is attributable to higher variable selling costs associated with the increase in net sales, incentive compensation expense associated with increased profitability, warranty expense, pension and medical benefit costs, legal expenses, marketing, new product development, and charitable donations. Specifically, combined expenses for fiscal 2006 related to incentive compensation, pension, and donations increased $14.5 million from the prior year. We also incurred additional compensation expenses in the current year, totaling approximately $3.5 million in operating expenses, as a result of the extra week of operations. Furthermore, as discussed, we had what may be the largest slate of new product introductions in our history during fiscal 2006. This drove an increase in design and research expenses as well as marketing spending in the year.

The increase in warranty expenses over the prior year was primarily driven by the increase in net sales for the period. In addition, a portion of the increase was due to the establishment of liabilities for specific warranty matters that became known during the year. The majority of the specific items identified during the year related to products manufactured prior to the implementation of our current quality testing protocol. Refer to Note 21 for further information regarding warranty matters.

The increase in legal expenses in the current year was partially due to costs incurred in proactively protecting the value of our intellectual property assets. We also incurred expenses during fiscal 2006 in establishing our legal trading structure in mainland China. Additionally, during the fourth quarter of fiscal 2006, we established an estimated liability associated with the previously disclosed New York Attorney General investigation regarding the minimum advertised price program maintained by our Herman Miller for the Home division. For further information regarding pending legal contingencies, refer to Note 21.

Finally, as discussed in Note 21, our fiscal 2006 operating expenses included a pre-tax charge totaling approximately $1.4 million related to a long-term lease arrangement in the United Kingdom.

Fiscal 2005 Compared to Fiscal 2004

The comparison of operating expenses between fiscal 2005 and fiscal 2004 was also significantly affected by the GSA reserve adjustment discussed above. Exclusive of this adjustment, Selling, General, and Administrative expenses in fiscal 2005 increased by approximately $35.6 million, or 11.7 percent from the prior year level. A significant portion of this increase related to higher fiscal 2005 spending on marketing activities related to new product launches as well as in categories that vary with sales volume, such as sales incentive compensation.

Another factor contributing to the year-over-year expense increase in fiscal 2005 was the consolidation of additional dealership financial results. During the first quarter of fiscal 2005, we acquired certain assets and liabilities of Office Interiors, Inc., a contract furniture dealership based in Oklahoma City, Oklahoma. Also in the first quarter of fiscal 2005, we began consolidating the financial operations of two independent dealers considered VIEs under FIN 46(R). The consolidation of these dealers increased our total fiscal 2005 operating expenses by approximately $7.0 million in comparison to fiscal 2004.

Also, our fiscal 2004 operating expenses included a pre-tax credit of $5.2 million related to the reversal of a previously established legal accrual balance. This adjustment was recorded early in fiscal 2004 as a result of a favorable court ruling related to a previous lawsuit.

Additional Items Affecting Operating Earnings

Changes in foreign currency exchange rates relative to the U.S. dollar have also had an effect on our operating expense comparisons. We estimate the year-over-year change in exchange rates effectively decreased the U.S. dollar value of our international operating expenses by $0.8 million in fiscal 2006. By comparison, we estimate that year-over-year changes in foreign currency exchange rates resulted in an increase of approximately $2.9 million in fiscal 2005 relative to the previous year.

Design and research costs included in total operating expenses were $43.0 million, $40.2 million, and $40.0 million for fiscal years 2006, 2005, and 2004, respectively. These expenses include royalty payments to designers of our products as the products are sold. We consider such royalty payments, which totaled $8.7 million, $7.5 million, and $5.4 million in fiscal years 2006, 2005, and 2004, respectively, to be variable costs of the products being sold. Accordingly, we do not include them in research and development costs as discussed in Note 1.

Restructuring charges in the current and prior fiscal years primarily related to the Canton, Georgia consolidation. Our Canton facility, which was exited in fiscal 2004, remains listed for sale. Therefore, the carrying values of the Canton assets, which were previously reduced to their estimated fair market values totaling $7.5 million, remain classified as long-term in net property and equipment at the end of fiscal 2006. Refer to Note 3 for more information regarding restructuring activities. Restructuring expenses incurred in fiscal 2004 also related primarily to the Canton consolidation.

Operating earnings rose 29.4 percent to a total of $157.7 million or 9.1 percent of net sales in fiscal 2006. By comparison, operating earnings in fiscal 2005 totaled $121.9 million or 8.0 percent of net sales. We reported operating earnings of $61.2 million or 4.6 percent of net sales in fiscal year 2004.

Other Expenses and Income

Net other expenses totaled $10.1 million in fiscal 2006 compared to $9.1 million in the prior year. The year-over-year increase resulted primarily from two dealership transactions in fiscal 2005. During the first quarter of fiscal 2005, we recorded a pre-tax gain totaling approximately $0.5 million related to the ownership transition of one of the VIE’s we initially began consolidating at the end of fiscal 2004. Also during the first quarter of last year, we acquired certain assets and liabilities of an independent contract furniture dealership. In doing so, we recognized a pre-tax gain of $0.4 million due to the reversal of a financial guarantee liability. These gains were reflected as a reduction to net other expenses in fiscal 2005.

Interest expense had a minimal impact on the year-over-year comparison of net other expenses for fiscal 2006. While interest rates have been rising, the impact on expense was mitigated by our lower outstanding debt levels in comparison to the prior year.

The year-over-year decline in net other expenses between fiscal years 2004 and 2005 was primarily due to a reduction in interest expense resulting from lower overall debt levels. Additionally, fiscal 2005 interest income was higher than the prior year due to the impact of comparatively higher interest rates on our cash and investment balances.

Foreign currency transactions resulted in a net gain of $0.3 million for fiscal 2006 compared to net gains of $0.2 million in the prior year and $0.1 million in fiscal 2004.

Income Taxes

Our effective tax rate was 32.3 percent in fiscal 2006 versus 39.6 percent in fiscal 2005. The current year effective rate was below the statutory rate primarily due to tax benefits from R&D activities, increased export sales, and the manufacturing deduction under the American Jobs Creations Act of 2004 (AJCA). In addition, we recorded a tax benefit totaling approximately $1.5 million during fiscal 2006 related to one-time adjustments to accrued taxes. The effective rate in fiscal 2005 was higher than the statutory rate due primarily to a tax charge, recorded in the fourth quarter, related to our planned cash repatriation under the AJCA. As a result of our planned repatriation of approximately $45 million, we recorded tax expense of approximately $4.4 million in the fourth quarter of fiscal 2005. We also recorded tax true-ups in the fourth quarter of fiscal 2005, driven by tax law changes, as well as other federal, state, and international accrual adjustments.

Our effective tax rate in fiscal 2004 totaled 17.1 percent. In that year, we recorded a $6.9 million benefit from the release of tax reserves as a result of the closure of IRS audits for the years 1999 through 2001.

We expect our effective tax rate for fiscal 2007 to be between 33 and 35 percent. For further information regarding income taxes, refer to Note 17.

Cumulative Effect of Accounting Change

We adopted FIN 46(R) at the end of fiscal 2004. This new accounting standard broadened the rules for determining whether a company is required to consolidate the financial statements of another entity. FIN 46(R) required us to consolidate the financial statements of two independent contract furniture dealerships to which we had provided ongoing financial support through loans and/or financial guarantees.

As a result of this consolidation, our fiscal 2004 Consolidated Statement of Operations included a non-cash cumulative effect loss of $0.5 million, or slightly less than $0.01 per share, net of tax. As this new accounting standard was adopted at the end of fiscal 2004, the consolidation had no material impact on our fiscal 2004 Consolidated Statement of Operations beyond that of the cumulative effect.

During the first quarter of fiscal 2005, a qualifying triggering event occurred with one of the VIEs which resulted in reconsideration under FIN 46(R). Based on this reconsideration, it was determined that we were no longer considered the primary beneficiary. As such, we recorded the ownership transition and ceased consolidation of the dealership in the first quarter of fiscal 2005. This resulted in a pre-tax gain of $0.5 million, which we recorded as “Other Expenses (Income)” in the Consolidated Statement of Operations. Excluding the gain on the ownership transition in the first quarter, the consolidation of the remaining VIE reduced net earnings by $0.1 million in fiscal 2005.

During the first quarter of fiscal 2006, a qualifying triggering event occurred with the remaining VIE which resulted in reconsideration under FIN 46(R). Based on this reconsideration, it was determined we were no longer considered the primary beneficiary. As such, we ceased consolidation of the independent dealership in the first quarter of fiscal 2006. This resulted in a pre-tax loss of $0.1 million which is reflected in “Other Expenses (Income)” in the Consolidated Statement of Operations. Net earnings in the first quarter of fiscal 2006 were not significantly affected by the consolidation of this VIE up to the point of the qualifying triggering event. This is because the net earnings of the VIE were primarily attributed to, and therefore offset by, minority interest of $0.7 million. Refer to Note 4 of the consolidated financial statements for additional information on FIN 46(R).

Net Earnings

Net earnings in fiscal 2006 totaled approximately $99.2 million or $1.45 per diluted share. In fiscal 2005, we generated net earnings of $68.0 million or $0.96 per diluted share. Earnings per share in fiscal 2005 include income of approximately $0.12 per share, net of taxes, from the adjustment to GSA reserves as previously discussed. In addition, net earnings in fiscal 2005 were reduced by approximately $0.06 per diluted share from taxes related to our then anticipated cash repatriation under the AJCA. Net earnings in fiscal year 2004 totaled $42.3 million or approximately $0.58 per diluted share. The per-share impact of restructuring charges, net of income taxes, was less than $0.01 in fiscal 2006. In fiscal years 2005 and 2004, after-tax restructuring charges totaled approximately $0.01 and $0.09 per share, respectively.

Liquidity and Capital Resources

The table below presents certain key cash flow and capital highlights for the fiscal years indicated.

(In Millions)		2006				2005				2004
Cash and cash equivalents, end of period		$	106.8			$	154.4			$	189.2
Short term investments, end of period		$	15.2			$	13.9			$	10.7
Cash generated from operating activities		$	150.4			$	109.3			$	82.7
Cash used for investing activities		$	(47.6	)		$	(40.1	)		$	(21.9	)
Cash used for financing activities		$	(151.4	)		$	(106.6	)		$	(60.0	)
Restructuring-related cash outflows		$	(0.9	)		$	(1.9	)		$	(12.8	)
Pension plan contributions		$	(24.7	)		$	(25.6	)		$	(28.3	)
Capital expenditures		$	(50.8	)		$	(34.9	)		$	(26.7	)
Stock repurchased and retired		$	(155.1	)		$	(131.6	)		$	(62.0	)
Interest-bearing debt, end of period (4)		$	178.8			$	194.0			$	207.2
Available unsecured credit facility, end of period (5)		$	136.8			$	137.2			$	186.2

At the end of fiscal year 2005, we reported our plan to take advantage of the one-time tax deduction related to the repatriation of undistributed foreign earnings under the AJCA. During the first quarter of fiscal 2006, we repatriated approximately $35 million of undistributed earnings from certain of our foreign entities. An additional $9 million of undistributed foreign earnings was repatriated during the second quarter of fiscal 2006. Our dividend reinvestment plan requires these funds to be used for capital purchases and investment in research and development.

Cash Flow – Operating Activities

Cash flows from operating activities totaled $150.4 million for fiscal 2006 compared to $109.3 million last year. Changes in working capital balances resulted in a $20.4 million source of cash during fiscal 2006 compared to a $21.4 million source of cash in the prior year. The source of working capital cash flow in the current fiscal year resulted principally from an increase in accounts payable and accrued liabilities, namely employee compensation and warranty accruals. This was partially offset by volume-related increases in accounts receivable and inventory levels, excluding the effects of inventory changes related to the three dealerships we no longer own or consolidate under FIN 46(R). By comparison, the cash source in working capital for fiscal 2005 was primarily the result of higher accounts payable and accrued liabilities for employee compensation and benefits and income taxes. Partially offsetting these favorable balance changes were volume-related increases in inventory and accounts receivable

During fiscal year 2004, changes in working capital balances resulted in a net use of cash totaling $19.4 million. In that period, we experienced a decrease in accrued income taxes and increases in both accounts receivable and inventories. These negative factors were partially offset by a production-driven increase in accounts payable, increased compensation and benefit accruals, and favorable changes in deferred taxes.

Collections of accounts receivable remained strong throughout the year, and we believe our recorded accounts receivable valuation allowances at the end of fiscal 2006 are adequate to cover the risk of potential bad debts. Allowances for non-collectible accounts receivable, as a percent of gross accounts receivable, totaled 2.8, 3.2, and 5.4 percent at the end of fiscal years 2006, 2005, and 2004, respectively. The reduction in these percentages over this time period was driven by an overall improvement in the quality of our accounts receivable aging.

Included in operating cash flows are cash contributions made to our employee pension plans which totaled $24.7 million, $25.6 million, and $28.3 million in fiscal years 2006, 2005, and 2004, respectively. For further information regarding the company’s pension plans, refer to Note 13.

Restructuring-related cash payments, which are also included in operating cash flows, totaled $0.9 million, $1.9 million, and $12.8 million in fiscal years 2006, 2005, and 2004, respectively. Refer to Note 3 for further information regarding the company’s restructuring activities.

Cash Flow – Investing Activities

Capital expenditures totaled $50.8 million in fiscal 2006 and $34.9 million in the prior fiscal year. The increase in spending over the prior year primarily relates to new product development initiatives and the construction of our new office and showroom facility in the United Kingdom. At the end of fiscal 2006, we had outstanding commitments for future capital purchases of approximately $11.0 million. We expect full-year capital expenditures in 2007 to total between $55 million and $60 million. A large portion of the planned increase over the current year is for expected spending related to our National Design Center in Atlanta, the startup of our operation in mainland China, and tooling related to our recent product launches.

As previously discussed, we sold two wholly-owned contract furniture dealerships during the first quarter of fiscal 2006. Proceeds received in connection with these sales, which had the effect of increasing cash flows from investing activities, totaled $2.1 million.

Net cash received from the repayment of notes receivable in fiscal 2006 was primarily driven by a payment received from a contract dealership previously consolidated under FIN 46(R). As mentioned earlier in this report, this VIE was able to obtain financing with an outside bank and, therefore, was able to repay a large portion of its debt owed to us during the first quarter of fiscal 2006.

At the end of fiscal 2005, we reclassified assets with a net carrying value of $0.4 million to current assets held for sale. These assets related to a warehouse/storage facility in West Michigan that we had previously exited.

During the first quarter of fiscal 2006, the sale of these assets was finalized. In connection with the sale, we received proceeds totaling $0.7 million.

In the first quarter of fiscal 2005, cash flows from investing activities included a payment totaling $0.7 million related to the acquisition of certain assets and liabilities of a contract furniture dealership based in Oklahoma. This acquisition is discussed further in Note 2.

Cash outflows for investing activities in fiscal 2004 included capital expenditures of $26.7 million. We also received proceeds totaling $6.0 million related to the sale of our Holland, Michigan, Chair Plant facility during fiscal 2004.

Cash Flow – Financing Activities

(In Millions, Except Share and Per Share Data)		2006				2005				2004
Shares acquired			5,124,306				4,877,832				2,462,996
Cost of shares acquired		$	155.1			$	131.6			$	62.0
Average cost per share acquired		$	30.27			$	26.98			$	25.18
Shares issued			1,572,769				2,712,842				1,384,094
Average price per share issued		$	23.50			$	23.91			$	21.61
Cash dividends		$	20.3			$	20.4			$	10.6
Dividends paid per share		$	0.2975			$	0.290			$	0.145

Share repurchases were the most significant factor affecting cash outflows from financing activities during the past three fiscal years. Our Board of Directors approved a new share repurchase authorization of $150 million in the third quarter of fiscal 2006. Consequently, at the end of fiscal 2006, we had $103.0 million available for future share repurchases.

Dividend payments during fiscal 2006 totaled $20.3 million as compared to $20.4 million last year. During the third quarter of fiscal 2006, our Board of Directors also approved a 10 percent increase in the quarterly cash dividend. The new quarterly cash dividend of $0.08 per share was effective with the dividend payment in April 2006.

Interest-bearing debt at the end of fiscal 2006 of $178.8 million decreased $15.2 million from $194.0 million at the end of fiscal 2005. The majority of this decline was due to a scheduled $13 million payment we made during the fourth quarter of fiscal 2006 on our private placement notes. Our next scheduled debt repayment of $3.0 million on our private placement notes is expected to be paid in the fourth quarter of fiscal 2007.

The remaining reduction in debt represents the decline in the fair value of our interest rate swap arrangements during fiscal 2006. The combined fair values of the interest rate swap arrangements, as further described in Note 19, was negative $2.2 million at the end of fiscal 2006, compared to a negligible amount at the end of the prior fiscal year. The fair values of these swap arrangements change based on fluctuations in market interest rates. Such changes are not included in net earnings for the period. Instead, they are reflected as adjustments to our consolidated assets and/or liabilities. At the end of fiscal 2006, the portion of our total interest-bearing debt that was effectively converted to a variable-rate basis through our swap arrangements totaled $56 million. The impact on interest expense due to the swap arrangements resulted in an interest expense addition of approximately $0.2 million in fiscal 2006. In fiscal 2005 and 2004, the impact on interest expense due to the swap arrangements resulted in a reduction of approximately $1.1 million and $1.6 million, respectively.

During the first quarter of fiscal 2005, we paid off $1.5 million of notes payable associated with one of the VIE’s initially consolidated under FIN 46(R) as further described in Note 4.

The only usage against our unsecured revolving credit facility at the end of fiscal years 2006 and 2005 represented outstanding standby letters of credit totaling $13.2 million and $12.8 million, respectively. The provisions of our private placement notes and unsecured credit facility require that we adhere to certain covenant restrictions and maintain certain performance ratios. We were in compliance with all such restrictions and performance ratios again this quarter and expect to remain in compliance in the future.

Partially offsetting the effects of our share repurchases, dividend payments, and debt payments during the period was cash received related to stock-based benefit plans. During fiscal 2006, we received $37.0 million from the issuance of shares in connection with these plans, net of $3.7 million tax. By comparison, we received $59.9 million, net of $4.8 million tax, from the issuance of shares in fiscal 2005. In fiscal 2004, we received $27.4 million, net of $2.5 million tax from the issuance of shares.

We believe cash on hand, cash generated from operations, and our borrowing capacity will provide adequate liquidity to fund near term and future business operations and capital needs.

Contingencies

As previously reported, the company received a subpoena from the New York Attorney General’s office requesting certain information relating to the minimum advertised price program maintained by the Herman Miller for the Home division. In connection with this matter, the New York Attorney General’s office has taken depositions of current and former employees of the company and certain dealers. The company and the New York Attorney General’s office have had preliminary discussions regarding possible methods of resolving the matter. The company has reserved its best estimate of a potential amount to resolve this matter. The accrued amount is not material to the company’s consolidated financial position.

The company leases a facility in the UK under an agreement that expires in January 2008. Under the terms of the lease, the company is required to perform the maintenance and repairs necessary to address the general dilapidation of the facility over the lease term. The ultimate cost of this provision to the company is dependent on a number of factors including, but not limited to, the future use of the facility by the lessor and whether the company chooses and is permitted to renew the lease term. The company has estimated the cost of these maintenance and repairs to be between $0 and $3 million, depending on the outcome of future plans and negotiations. Based on existing circumstances, it is estimated that these costs will most likely approximate $0.5 million. As a result, this amount has been recorded as a liability reflected under the caption “Other Liabilities” in the Consolidated Balance Sheets as of June 3, 2006, and May 28, 2005.

In May 1996, the company assigned its rights as lessee of a UK facility to a third party under an agreement that contained a provision granting the third party the right to re-assign the lease to the company after 10 years, at its election. During the first quarter of 2006, the company was notified by the third party that it is no longer using the space and intends to exercise the re-assignment option. The original lease term expires in May 2014. The company believes it will be able to assign or sublet the lease for the majority of the remaining lease term to another tenant at current market rates. However, current market rates for comparable office space are lower than the rental payments owed under the lease agreement. As such, the company would remain liable to pay the difference. As a result, the company recorded a pre-tax charge of $0.7 million to “Operating Expenses” in the first quarter of fiscal 2006 for the expected loss under the arrangement based on the best information available at the time. During the third quarter of fiscal 2006, the company revised its estimate of the time required to find a tenant. This resulted in an additional pre-tax charge during the third quarter of $0.7 million. The corresponding impact on our full-year net earnings was $0.9 million, net of a $0.5 million tax benefit, or approximately $0.01 per diluted share. It is currently estimated that the present value of the future cost to the company under the arrangement will most likely approximate $1.4 million, which is reflected as a liability within “Other Liabilities” as of June 3, 2006.

We are also involved in legal proceedings and litigation arising in the ordinary course of business. It is our opinion that the outcome of such proceedings and litigation currently pending will not materially affect our consolidated financial statements.

Basis of Presentation

The company’s fiscal year ends on the Saturday closest to May 31. Fiscal 2006, the year ended June 3, 2006, contains 53 weeks while the years ended May 28, 2005, and May 29, 2004, contained 52 weeks. This is the basis upon which all of the above weekly average data is presented. The extra week in fiscal 2006 is required approximately every six years in order to realign our fiscal-calendar-end dates with the actual calendar months.

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 11 of the consolidated financial statements. Likewise, further information related to operating leases can be found in Note 12.

(In Millions)		Payments due by fiscal year
Contractual Obligations		Total				2007				2008-2009				2010-2011				Thereafter
Long-Term Debt (6), (12)		$	181.0			$	3.0			$	3.0			$	175.0			$	—
Estimated Interest on Debt Obligations (7)			62.6				13.4				26.1				23.2				—
Operating Leases			68.5				18.9				26.4				12.5				10.6
Purchase obligations (8)			38.1				35.6				2.6				—				—
Pension Plan Funding (9)			0.8				0.8				—				—				—
Shareholder Dividends (10), (12)			5.3				5.3				—				—				—
Other (11), (12)			11.3				1.4				2.6				2.4				4.8
Total		$	367.6			$	78.3			$	60.7			$	213.1			$	15.5

Off-Balance Sheet Arrangements

Guarantees

We provide certain guarantees to third parties under various arrangements in the form of product warranties, loan guarantees, standby letters of credit, lease guarantees, performance bonds, and indemnification provisions. These arrangements are accounted for and disclosed in accordance with FIN 45, “Guarantor’s Accounting and Disclosure Requirement for Guarantees, Including Indirect Guarantees of Indebtedness of Others” as described in Note 21 of the consolidated financial statements.

Variable Interest Entities

On occasion, we provide financial support to certain independent dealers in the form of term loans, lines of credit, and/or loan guarantees which may represent variable interests in such entities. At June 3, 2006, we were not considered the primary beneficiary of any such dealer relationships under FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46(R)). Refer to Note 4 for further information on VIE-related transactions.

The risks and rewards associated with our interests in these other dealerships are primarily limited to our outstanding loans and guarantee amounts. As of June 3, 2006, our maximum exposure to potential losses related to financing provided to these other entities totaled $4.6 million. Information on our exposure related to outstanding loan guarantees provided to such entities is included in Note 21 of the consolidated financial statements.

Critical Accounting Policies and Estimates

We attempt to report our financial results clearly and understandably. We follow accounting principles generally accepted in the U.S. in preparing our consolidated financial statements, which require us to make certain estimates and apply judgments that affect our financial position and results of operations. We continually review our accounting policies and financial information disclosures. These policies and disclosures are reviewed at least annually with the Audit Committee of the Board of Directors. Following is a summary of our more significant accounting policies that require the use of estimates and judgments in preparing the financial statements.

Revenue Recognition

As described in the “Executive Overview,” the majority of our products and services are sold through one of four channels: Independent contract furniture dealers and licensees, owned contract furniture dealers, direct to end customers, and independent retailers. We recognize revenue on sales to independent dealers, licensees, and retailers once the product is shipped and title passes to the buyer. When we sell product directly to the end customer or to owned dealers, revenue is recognized once the product and services are delivered and installation is substantially complete.

Amounts recorded as net sales generally include freight charged to customers, with the related freight expenses recognized within cost of sales. Items such as discounts off list price, rebates, and other sale-related marketing program expenses are recorded as reductions to net sales. We record accruals for rebates and other marketing programs, which require us to make estimates about future customer buying patterns and market conditions. Customer sales that reach (or fail to reach) certain levels can affect the amount of such estimates, and actual results could differ from our estimates.

Receivable Allowances

We base our allowances related to receivables on known customer exposures, historical credit experience, and the specific identification of other potential problems, including the economic climate. These methods are applied to all major receivables, including trade, lease, and notes receivable. In addition, we follow a policy that consistently applies reserve rates based on the age of outstanding accounts receivable. Actual collections can differ from our historical experience, and if economic or business conditions deteriorate significantly, adjustments to these reserves could be required.

The accounts receivable allowance totaled $5.0 million and $5.6 million at June 3, 2006 and May 28, 2005, respectively. This year-over-year reduction is attributable to the overall improvement in the quality of our accounts receivable aging.

Goodwill

The net carrying value of our goodwill assets at June 3, 2006, totaled $39.1 million. We account for our goodwill assets in accordance with Statement of Financial Accounting Standards (SFAS) No. 142. Under this accounting guidance, we are required to perform an annual test on our goodwill assets, by reporting unit, to determine whether the asset values are impaired. If impairment is determined, we are required to recognize a charge sufficient to reduce the net carrying value of the assets to their estimated fair market value.

Our impairment-testing model is based on the present value of projected cash flows and a residual value. In completing the test under this approach, we assume that the value of a business today is derived from the cash flow it will generate in the future. We also assume that such future cash flows can be reasonably estimated. While these projected cash flows reflect our best estimate of future reporting unit performance, actual cash flows may differ significantly.

The results of this test, performed in the fourth quarter of fiscal 2006, indicated that our net goodwill asset values were not impaired. We employed a market-based approach in selecting the discount rates used in our analysis. By this, we mean the discount rates selected represent market rates of return equal to what we believe a reasonable investor would expect to achieve on investments of similar size to our reporting units. We believe the discount rates selected in our testing are conservative in that, in all cases, they exceed the estimated weighted average cost of capital for our business as a whole. The results of the impairment test are sensitive to changes in the discount rates. Our testing as of June 3, 2006, indicates that a substantial increase in the discount rates utilized would be required before the results would indicate a potential impairment issue.

Warranty Reserve

We stand behind our products and keep our promises to customers. From time to time, quality issues arise resulting in the need to incur costs to correct problems with products or services. We have established warranty reserves for the various costs associated with these guarantees. General warranty reserves are based on historical claims experience and periodically adjusted for business levels. Specific reserves are established once an issue is identified. The valuations of such reserves are based on the estimated costs to correct the problem. Actual costs may vary and result in an adjustment to our reserves.

Inventory Reserves

Inventories are valued at the lower of cost or market. The inventories at the majority of our manufacturing operations are valued using the last-in, first-out (LIFO) method, whereas inventories of certain other subsidiaries are valued using the first-in, first-out (FIFO) method. We establish reserves for excess and obsolete inventory, based on material movement and judgment for consideration of current events, such as economic conditions, that may affect inventory. The amount of reserve required to record inventory at lower of cost or market may be adjusted as conditions change.

Income Taxes

Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse.

We have net operating loss (NOL) carryforwards available in certain jurisdictions to reduce future taxable income. We also have foreign tax credits available in certain jurisdictions to reduce future tax due. Future tax benefits for NOL carryforwards and foreign tax credits are recognized to the extent that realization of these benefits is considered more likely than not. We base this determination on the expectation that related operations will be sufficiently profitable or various tax planning strategies available to us will enable us to utilize the NOL carryforwards and/or foreign tax credits. When information becomes available that raises doubts about the realization of a deferred income tax asset, a valuation allowance is established.

Self-Insurance Reserves

With the assistance of independent actuaries, we establish reserves for workers’ compensation and general liability exposures. The reserves are established based on actuarially-determined expected future claims. We also establish reserves for health benefit exposures based on historical claims information along with certain assumptions about future trends. The methods and assumptions used to determine the liabilities are applied consistently, although actual claims experience can vary. We also maintain insurance coverage for certain risk exposures through traditional premium-based insurance policies.

Pension and other Post-Retirement Benefits

The determination of the obligation and expense for pension and other post-retirement benefits depends on certain actuarial assumptions. Among the most significant of these assumptions are the discount rate, interest-crediting rate, and expected long-term rate of return on plan assets. We determine these assumptions as follows:

Discount Rate

This assumption is established at the end of the fiscal year based on high-quality corporate bond yields. We utilize the services of an independent actuarial firm to analyze and recommend an appropriate rate. For our domestic pension and other post-retirement benefit plans, the actuary uses a “bond-matching” technique, which compares the estimated future cash flows of the plan to various corporate bond portfolios with similar cash flow durations. We set the discount rate for our international pension plan based on the yield level of a commonly used corporate bond index. Because the average duration of the bonds underlying this index is less than that of our international pension plan liabilities, the index yield is used as a reference point. The final discount rate, which takes into consideration the index yield and the difference in comparative durations, is based on a recommendation from our independent actuarial consultant.

The discount rates selected for our domestic pension and post-retirement benefit plans at the end of fiscal 2006 were higher than those established at the end of fiscal 2005. With all other assumptions and values held constant, this change would result in a decrease in our pension and post-retirement benefit plan expenses for our 2007 fiscal year, which began on June 4, 2006. Conversely, the discount rate selected for our international pension plan at the end of the current year was lower than the rate established at the end of fiscal 2005. This change would result in an increase in our international pension plan expense for fiscal 2007 if all other assumptions were held constant.

Interest Crediting Rate

We use this assumption in accounting for our primary domestic pension plan, which is a cash balance-type plan. The rate, which represents the annual rate of interest applied to each plan participant’s account balance, is established at an assumed level, or spread, below the discount rate. We base this methodology on the historical spread between the U.S. Treasury and high-quality corporate bond yields. This relationship is examined annually to determine whether the methodology is appropriate.

Expected Long-Term Rate of Return

We base this assumption on our long-term assumed rates of return for equities and fixed income securities, weighted by the allocation of the invested assets of the pension plan. We consider risk factors specific to the various classes of investments and advice from independent actuaries in establishing this rate. Changes in the investment allocation of plan assets would impact this assumption. A shift to a higher relative percentage of fixed income securities, for example, would result in a lower assumed rate.

While this assumption represents our long-term market return expectation, actual asset returns can differ from year-to-year. Such differences give rise to unrecognized actuarial gains and losses. In years where actual market returns are lower than the assumed rate, an unrecognized actuarial loss is

generated. Conversely, an unrecognized actuarial gain results when actual market returns exceed the assumed rate in a given year. As of June 3, 2006, and May 28, 2005, the net unrecognized actuarial loss associated with our employee retirement plans totaled approximately $116.6 million and $117.5 million, respectively. In both periods, the majority of this unrecognized loss was associated with less than expected plan asset returns.

For purposes of determining annual net pension expense, we use a calculated method for determining the market-related value of plan assets. Under this method, we recognize the change in fair value of plan assets systematically over a five-year period. Accordingly, a large portion of our net actuarial loss is deferred. The remaining portion of the net actuarial loss is subject to amortization expense each year. The amortization period used in determining this expense is the estimated remaining working life of active pension plan participants. We currently estimate this period to be approximately 13 years. As of the beginning of fiscal year 2006, the deferred net actuarial loss (i.e., the portion of the total net actuarial loss not subject to amortization) was approximately $19.9 million.

Refer to Note 13 of the consolidated financial statements for more information regarding costs and assumptions used for employee benefit plans.

Long-Lived Assets

We evaluate long-lived assets and acquired businesses for indicators of impairment when events or circumstances indicate that a risk may be present. Our judgments regarding the existence of impairment are based on market conditions, operational performance, and estimated future cash flows. If the carrying value of a long-lived asset is considered impaired, an impairment charge is recorded to adjust the asset to its estimated fair value.

Stock-Based Compensation

We view stock-based compensation as a key component of total compensation for certain of our employees and non-employee directors. We account for these plans, which include grants of restricted stock, restricted stock units, employee stock purchase, and stock options, in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations (APB 25). Under this guidance we recognize compensation expense related to grants of restricted stock and stock units. For stock options issuances, we do not recognize compensation expense when the stock options are granted to employees and directors at or above fair market value as of the grant date.

As required by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – An Amendment of FASB Statement No. 123,” we have been disclosing in the notes to the consolidated financial statements the pro-forma impact on net earnings and earnings per share had we recognized expense related to stock option-based compensation. These pro-forma disclosures require us to estimate a fair value for each stock option issued. In completing this valuation, we utilize the Black-Scholes option-pricing model that requires the use of several input assumptions. Among the most significant of these assumptions are the expected volatility of our common stock price, and the expected timing of future stock option exercises. Certain assumptions affecting stock-based compensation are described below.

Expected Volatility

This represents a measure, expressed as a percentage, of the expected fluctuation in the market price of our common stock. As a point of reference, a high volatility percentage would assume a wider expected range of market returns for a particular security. All other assumptions held constant, this would yield a higher stock option valuation than a calculation using a lower measure of volatility. For purposes of determining our pro-forma footnote disclosure in fiscal year 2006, we have assumed an expected volatility of 30 percent.

Expected Term of Options

This assumption represents the expected length of time between the grant date of a stock option and the date at which it is exercised (option life). For fiscal year 2006, we assumed average expected option lives of between 1.6 and 5 years in calculating our pro-forma footnote disclosure.

Refer to Notes 1, 15, and 16 for further discussion on our stock-based compensation plans as well as the effective date of new accounting guidance that will require us to recognize compensation expense on grants of stock options beginning with our 2007 fiscal year.

New Accounting Standards

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs”. This Statement amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS 151 requires that those items be recognized as current-period charges. In addition, this Statement requires that fixed production overhead expenses be allocated to inventory based on the “normal capacity” of the production facilities. The provisions of SFAS 151 are effective for inventory costs incurred in fiscal years beginning after June 15, 2005. As such, the company is required to adopt these provisions at the beginning of fiscal year 2007. The company does not expect the adoption of SFAS 151 to have a material impact on its consolidated financial statements.

In December 2004, the FASB issued a revision of SFAS No. 123, “Share-Based Payment” (SFAS 123(R)), which supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. This statement focuses primarily on transactions in which an entity obtains employee services in exchange for share-based payments. Under SFAS 123(R), a public entity generally is required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award, with such cost recognized over the applicable vesting period. This new accounting treatment is also required for any share-based payments to the company’s Board of Directors. SFAS 123(R) also requires an entity to provide certain disclosures in order to assist in understanding the nature of share-based payment transactions and the effects of those transactions on the financial statements. Registrants are required to adopt SFAS 123(R) no later than the beginning of the fiscal year beginning after June 15, 2005. As such, the company is required to adopt the provisions of SFAS 123(R) at the beginning of fiscal 2007. The company plans to adopt this new method of accounting using the modified prospective method, as defined within the transition provisions of SFAS 123(R), and to continue using the Black-Scholes model to determine the fair value of stock options. Factoring in the impact of adopting SFAS 123(R) in the first quarter of fiscal 2007, it is estimated that the company will recognize total pre-tax compensation expense of approximately $5 million during fiscal 2007 associated with the company’s stock-based awards. This compares to pre-tax stock-based compensation expense of $2.6 million recognized in fiscal 2006. Further information regarding the pro-forma earnings effect of the company’s stock-based awards for fiscal 2006 is provided in Note 1. The company continues to evaluate the impact that the implementation guidance and provisions included in SFAS 123(R) will have on its consolidated financial statements.

In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations, an Interpretation of FASB Statement No. 143” (FIN 47). Under FIN 47, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. Any uncertainty about the amount and/or timing of future settlement should be factored into the measurement of the liability when sufficient information exists. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value. The provisions of FIN 47 are required to be applied no later than the end of fiscal years ending after December 15, 2005, although early adoption is encouraged. As such, the company adopted the provisions of FIN 47 at the end of fiscal 2006. The adoption of FIN 47 did not have an impact on the company’s consolidated financial statements.

In November 2005, the FASB issued Staff Position (FSP) Nos. FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” This FSP addresses the accounting and disclosure for other-than-temporary impairments of investments, essentially endorsing existing guidance with certain modifications. The guidance in the FSP is required to be applied to fiscal periods beginning after December 15, 2005, although early adoption is permitted. As such, the company adopted the provisions of this FSP effective at the beginning of the fourth quarter of fiscal 2006. The adoption of the FSP did not have an impact on the company’s consolidated financial statements.

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (FIN 48), which clarifies the accounting for uncertainty in tax positions. Under FIN 48, the tax effects of a position should be recognized only if it is “more-likely-than-not” to be sustained based solely on its technical merits as of the reporting date. FIN 48 also requires significant new annual disclosures in the notes to the financial statements. The effect of adjustments at adoption should be recorded directly to beginning retaining earnings in the period of adoption and reported as a change in accounting principle. Retroactive application is prohibited under FIN 48. The guidance in FIN 48 is required to be applied to fiscal years beginning after December 15, 2006. As such, the company is required to adopt FIN 48 at the beginning of fiscal 2008. The company is currently evaluating the impact of FIN 48 on its consolidated financial statements.

Forward Looking Statements

Certain statements in this filing are not historical facts but are “forward-looking statements” as defined under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act, as amended. Such statements are based on management’s belief, assumptions, current expectations, estimates and projections about the office furniture industry, the economy and the company itself. Words like “anticipates,” “believes,” “confident,” “estimates,” “expects,” “forecast,” “likely,” “plans,” “projects,” and “should,” and variations of such words and similar expressions identify forward looking statements. These statements do not guarantee future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict with regard to timing, expense, likelihood and degree of occurrence. These risks include, without limitation, employment and general economic conditions in the U.S. and in our international markets, the increase in white collar employment, the willingness of customers to undertake capital expenditures, the types of products purchased by customers, the possibility of order cancellations or deferrals by customers, competitive pricing pressures, the availability and pricing of direct materials, our reliance on a limited number of suppliers, currency fluctuations, the ability to increase prices to absorb the additional costs of direct materials, the financial strength of our dealers, the financial strength of our customers, the mix of our products purchased by customers, the success of the transition to our new executive management team, our ability to attract and retain key executives and other qualified employees, our ability to continue to make product innovations, the strength of the intellectual property relating to our products, the success of newly introduced products, our ability to serve all of our markets, possible acquisitions, divestitures or alliances, the outcome of pending litigation or governmental audits or investigations, and other risks identified in this Form 10-K and our other filings with the Securities and Exchange Commission. Therefore, actual results and outcomes may materially differ from what we express or forecast. Furthermore, Herman Miller, Inc., takes no obligation to update, amend, or clarify forward-looking statements.

Item 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The company manufactures, markets, and sells its products throughout the world and, as a result, is subject to changing economic conditions, which could reduce the demand for its products.

Direct Material Costs

The company is exposed to risks arising from price changes for certain direct materials and assembly components used in its operations. The largest such costs incurred by the company are for steel, plastic/textiles, wood particleboard, and aluminum components. The market price of steel was relatively stable during fiscal 2006 and, in fact, improved slightly relative to the prior year. Consequently, it did not have a significant impact on the year-over-year gross margin comparison between fiscal years 2005 and 2006. During fiscal 2005, however, the price of steel increased significantly. As a result, the company estimates its direct material costs for steel components in fiscal 2005 increased between $18 million and $20 million in comparison to fiscal 2004.

The market price of plastics and textiles are sensitive to the cost of oil and natural gas. Oil and natural gas prices increased sharply during the latter half of fiscal 2005 and throughout fiscal 2006. As a result, the cost of plastics and textiles increased during this time period. In addition to the market dynamics of supply and demand, the cost of wood particleboard has been impacted by continual downsizing of production capacity in the wood market as well as increased costs in transportation related to oil increases. Aluminum component prices have risen in part due to high market demand and increased energy costs associated with the conversion of raw materials to aluminum ingots.

The company believes future market price increases on its key direct materials and assembly components are likely. Consequently, it views the prospect of such increases as an outlook risk to the business.

Foreign Exchange Risk

The company manufactures its products in the United States and the United Kingdom. It also sources completed products and product components from outside the United States. The company’s completed products are sold in numerous countries around the world. Sales in foreign countries as well as certain expenses related to those sales are transacted in currencies other than the company’s reporting currency, the U.S. dollar. Accordingly, production costs and profit margins related to these sales are affected by the currency exchange relationship between the countries where the sales take place and the countries where the products are sourced or manufactured. These currency exchange relationships can also affect the company’s competitive positions within these markets.

In the normal course of business, the company enters into contracts denominated in foreign currencies. The principal foreign currencies in which the company conducts its business are the British pound, Euro, Canadian dollar, Japanese Yen, and Mexican Peso. During the fourth quarter of fiscal 2006, the company entered into a forward currency instrument in order to offset €1.5 million of its Euro net asset exposure that is denominated in a non-functional currency. The forward currency instrument is marked to market at the end of the period, with changes in fair value reflected in net earnings. At June 3, 2006, the fair value of the forward currency instrument was negligible. At May 28, 2005, the company had no outstanding derivative financial instruments resulting from foreign currency hedge contracts.

Gains arising from remeasuring all foreign currency transactions into the appropriate functional currency, which were included in net earnings, totaled $0.3 million, $0.2 million, and $0.1 million for the years ended June 3, 2006, May 28, 2005, and May 29, 2004, respectively. Additionally, the cumulative effect of translating the balance sheet and income statement accounts from the functional currency into the United States dollar reduced the accumulated comprehensive loss component of total shareholders’ equity by $1.2 million, $3.9 million, and $3.4 million for the years ended June 3, 2006, May 28, 2005, and May 29, 2004, respectively.

Interest Rate Risk

The company maintains fixed-rate debt. For fixed-rate debt, changes in interest rates generally affect fair market value but not earnings or cash flows. The company does not have an incentive to prepay fixed rate debt prior to maturity, and as a result, interest rate risk and changes in fair market value should not have a significant impact on such debt until the company would be required to refinance it. The company has two separate interest rate swap instruments that, as of the end of fiscal year 2006, effectively convert $56 million in total of fixed-rate debt to a variable-rate basis. This debt is subject to changes in interest rates, which, if significant, could have a material impact on the company’s financial results. The interest rate swap derivative instruments are held and used by the company as a tool for managing interest rate risk. They are not used for trading or speculative purposes. The counterparties to these swap instruments are large financial institutions that the company believes are of high-quality creditworthiness. While the company may be exposed to potential losses due to the credit risk of non-performance by these counterparties, such losses are not anticipated.

The combined fair market value of effective swap instruments was negative $2.2 million at June 3, 2006, in comparison to a negligible amount at May 28, 2005. The impact on interest expense due to such swap instruments resulted in an addition to interest expense of approximately $0.2 million in fiscal 2006. In fiscal 2005 and 2004, the impact on interest expense due to the swap instruments resulted in a reduction of approximately $1.1 million and $1.6 million, respectively. All cash flows related to the company’s interest rate swap instruments are denominated in U.S. dollars. For further information, refer to Notes 18 and 19 to the consolidated financial statements.

As of June 3, 2006, the weighted-average interest rate on the company’s variable-rate debt was approximately 8.1 percent. Based on the level of variable-rate debt outstanding as of that date, a 1 percentage-point increase in the weighted-average interest rate would increase the company’s annual pre-tax interest expense by approximately $0.6 million.

Expected cash flows (notional amounts) over the next five years and thereafter related to debt instruments are as follows.

(In Millions)		2007				2008				2009				2010				2011				Thereafter				Total (1)
Long-term Debt:
Fixed Rate		$	3.0			$	3.0			$	—			$	—			$	175.0			$	—			$	181.0
Wtd. Average Interest Rate =7.10%
Derivative Financial Instruments Related to Debt – Interest Rate Swaps:
Pay Variable/Receive Fixed		$	3.0			$	3.0			$	—			$	—			$	—			$	—			$	6.0
Pay Interest Rate = 8.70% (at June 3, 2006)
Received Interest Rate = 6.52%
Pay Variable/Receive Fixed		$	—			$	—			$	—			$	—			$	50.0			$	—			$	50.0
Pay Interest Rate = 8.07% (at June 3, 2006)
Receive Interest Rate = 7.125%

Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Quarterly Financial Data (Unaudited)

Set forth below is a summary of the quarterly operating results on a consolidated basis for the years ended June 3, 2006, May 28, 2005, and May 29, 2004. Refer to Management’s Discussion and Analysis provided in Item 7 and the Notes to the Consolidated Financial Statements for further disclosure of significant accounting transactions that may have affected the quarterly operating results for each of the periods presented.

		First				Second				Third				Fourth
(In Millions, Except Per Share Data)		Quarter (3)				Quarter				Quarter				Quarter
2006 Net sales		$	430.9			$	438.2			$	424.0			$	444.1
Gross margin (2)			141.7				143.9				137.9				151.2
Net earnings (2)			23.7				27.9				22.4				25.0
Earnings per share-basic			.34				.41				.33				.38
Earnings per share-diluted			.34				.40				.33				.38
2005 Net sales		$	357.3			$	368.4			$	382.4			$	407.5
Gross margin (2)			112.1				120.0				122.9				134.9
Net earnings (2)			14.3				15.4				16.8				21.6
Earnings per share-basic			.20				.22				.24				.31
Earnings per share-diluted (2)			.20				.22				.24				.31
2004 Net sales (2)		$	324.5			$	330.3			$	329.6			$	353.8
Gross margin (2)			101.6				102.0				99.3				112.5
Earnings before cumulative effect of accounting changes (2),			6.2				9.1				7.8				19.8
Cumulative effect of accounting changes:
Variable interest entities (1)			—				—				—				(0.5	)
Net earnings (2)			6.2				9.1				7.8				19.3
Earnings per share – basic, before cumulative effect of accounting changes			.08				.12				.11				.28
Earnings per share-basic			.08				.12				.11				.27
Earnings per share – diluted, before cumulative effect of accounting changes			.08				.12				.11				.27
Earnings per share-diluted			.08				.12				.11				.27

Consolidated Statements Of Operations

		Fiscal Years Ended
(In Millions, Except Per Share Data)		June 3, 2006				May 28, 2005				May 29, 2004
Net Sales		$	1,737.2			$	1,515.6			$	1,338.3
Cost of Sales			1,162.4				1,025.8				922.7
Gross Margin			574.8				489.8				415.6
Operating Expenses:
Selling, general, and administrative (Note 21)			373.6				326.7				304.1
Design and research (Note 1)			43.0				40.2				40.0
Restructuring and impairment expenses (Note 3)			0.5				1.0				10.3
Total Operating Expenses			417.1				367.9				354.4
Operating Earnings			157.7				121.9				61.2
Other Expenses (Income):
Interest expense			14.0				14.0				14.1
Interest and other investment income			(4.9	)			(4.6	)			(4.5	)
Other, net			1.0				(0.3	)			—
Net Other Expenses			10.1				9.1				9.6
Earnings Before Income Taxes and Minority Interest			147.6				112.8				51.6
Income Tax Expense (Note 17)			47.7				44.7				8.8
Minority Interest, net of tax expense (Notes 2 and 4)			0.7				0.1				—
Earnings Before Cumulative Effect of a Change In Accounting Principle			99.2				68.0				42.8
Cumulative Effect of a Change in Accounting Principle, net of tax expense of $0.4 (Note 4)			—				—				(0.5	)
Net Earnings		$	99.2			$	68.0			$	42.3
Earnings Per Share – Basic:
Earnings Before Cumulative Effect of a Change In Accounting Principle		$	1.46			$	0.97			$	0.59
Cumulative Effect of a Change in Accounting Principle, net of tax expense			—				—				(0.01	)
Earnings Per Share – Basic		$	1.46			$	0.97			$	0.58
Earnings Per Share – Diluted:
Earnings Before Cumulative Effect of a Change In Accounting Principle		$	1.45			$	0.96			$	0.59
Cumulative Effect of a Change in Accounting Principle, net of tax expense			—				—				(0.01	)
Earnings Per Share – Diluted		$	1.45			$	0.96			$	0.58

Consolidated Balance Sheets

(In Millions, Except Share and Per Share Data)		June 3, 2006				May 28, 2005
Assets
Current Assets:
Cash and cash equivalents		$	106.8			$	154.4
Short-term investments (Note 1)			15.2				13.9
Accounts receivable, less allowances of $5.0 in 2006 and $5.6 in 2005			173.2				169.8
Inventories (Note 5)			47.1				47.4
Assets held for sale (Note 1)			—				0.4
Prepaid expenses and other (Note 6)			47.9				50.6
Total Current Assets			390.2				436.5
Property and Equipment:
Land and improvements			20.9				20.9
Buildings and improvements			139.1				132.5
Machinery and equipment			523.8				527.9
Construction in progress			23.5				14.3
			707.3				695.6
Less: accumulated depreciation			(504.0	)			(500.2	)
Net Property and Equipment			203.3				195.4
Goodwill			39.1				39.1
Other Assets (Note 7)			35.4				36.8
Total Assets		$	668.0			$	707.8
Liabilities and Shareholders’ Equity
Current Liabilities:
Unfunded checks		$	6.5			$	7.9
Current maturities of long-term debt (Note 11)			3.0				13.0
Accounts payable			112.3				106.6
Accrued liabilities (Note 8)			177.6				159.7
Total Current Liabilities			299.4				287.2
Long-term Debt, less current maturities (Note 11)			175.8				181.0
Other Liabilities (Note 9)			54.2				69.0
Total Liabilities			529.4				537.2
Minority Interest (Note 2)			0.2				0.1
Shareholders’ Equity:
Preferred stock, no par value (10,000,000 shares authorized, none issued)			—				—
Common stock, $0.20 par value (240,000,000 shares authorized, 66,034,452 and 69,585,989 shares issued and outstanding in 2006 and 2005, respectively)			13.2				13.9
Additional paid-in capital			—				—
Retained earnings			192.2				227.3
Accumulated other comprehensive loss (Note 1)			(63.3	)			(64.4	)
Key executive stock programs			(3.7	)			(6.3	)
Total Shareholders’ Equity			138.4				170.5
Total Liabilities and Shareholders’ Equity		$	668.0			$	707.8