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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K

Registrant’s telephone number, including area code: (616) 654 3000

Securities registered pursuant to Section 12(b) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X]   No [__]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [X]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes [X]   No [__]

The aggregate market value of the voting stock held by “nonaffiliates” of the registrant (for this purpose only, the affiliates of the registrant have been assumed to be the executive officers and directors of the registrant and their associates) as of November 29, 2003, was $1,845,866,973 (based on $26.05 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 30, 2004:
Common stock, $.20 par value—71,253,605 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 27, 2004, are incorporated into Part III of this report.

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TABLE OF CONTENTS

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PART 1

Item 1 BUSINESS

General Development of Business

The company researches, designs, manufactures and distributes interior furnishings 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 to work.

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 as of 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 Industry Segments

Information relating to industry segments is provided in the Operating Segments disclosure in Note 21 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, development, manufacture, and sale 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 Action Office®, Q™ System, Ethospace®, and Resolve®. Action Office, the company’s series of three freestanding office partition and furnishing systems, is believed to be the first such system to be introduced and nationally marketed and, as such, popularized the “open plan” approach to office space utilization. Ethospace is a system of movable full- and partial-height walls, with panels and individual wall segments that interchangeably attach to a wall framework. It includes wall-attached work surfaces and storage/display units, electrical distribution, lighting, organizing tools, and freestanding components. Resolve is a more flexible systems solution based on 120-degree angles around a steel pole and uses fabric screens and canopies for space definition. The company also offers a broad array of seating (including Aeron®, Mirra™, Equa®, Ergon®, Ambi®, and Reaction® office chairs), storage (including Meridian® filing products), wooden casegoods (including Geiger products), and freestanding furniture products (including Passage® and Abak).

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. Approximately 66 percent of the company’s sales in the fiscal year ended May 29, 2004 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 either the company’s own sales staff, its owned dealer network, or independent retailers.

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The company is also a recognized leader within its industry for the use, development, and integration of customer-centered technologies that enhance the reliability, speed, and efficiency of 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, storage, casegoods and freestanding furniture 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 and other healthcare facilities; (3) clinical, industrial, and educational laboratories; and (4) residential and other environments.

New Product and Industry Segment Information

During the past 12 months, the company has not made any public announcement of, or otherwise made public information about, a new product or a new industry segment that would require the investment of a material amount of the company’s assets or that would otherwise result in a material cost.

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 raw materials used are neither unique to the industry nor are they rare. As a result of market conditions, steel prices have risen dramatically in recent months. This trend has not affected the company’s ability to obtain such raw materials; however, there is a risk that the increasing prices could potentially affect the supply of steel in the future. Further information relating to raw material costs is provided in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 hereof.

Patents, Trademarks, Licenses, Etc.

The company has approximately 170 active United States utility patents on various components used in its products and approximately 101 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 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 the “Herman Miller,” “Action Office,” “Aeron,” “Mirra,” “PostureFit,” “Ergon,” “Equa,” “Ethospace,” “Resolve,” “Geiger,” and “Herman Miller Symbolic M,” and “Eames Lounge Chair Configuration” trademarks. The average remaining life of such patents and trademarks is approximately 6 years and 10 years, respectively.

Working Capital Practices

Information concerning the company’s inventory levels relative to its sales volume can be found under the Executive Business 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

No single dealer accounted for more than 4 percent of the company’s net sales in the fiscal year ended May 29, 2004. For fiscal 2004, the United States Government, through its General Services Administration (GSA), was the largest single end-user customer accounting for 10.0 percent of the company’s net sales. By comparison, GSA accounted for 9.6 percent and 8.1 percent of the company’s net sales for fiscal 2003 and fiscal 2002, respectively. The 10 largest customers accounted for approximately 19.9 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.

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Backlog of Orders

As of May 29, 2004, the company’s backlog of unfilled orders was $209.5 million. At May 31, 2003, the company’s backlog totaled $182.0 million. It is expected that substantially all the orders forming the backlog at May 29, 2004, will be filled during the current 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 price reduction and other 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.

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 significantly 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 $34.6 million, $33.3 million, and $33.9 million on design and research activities in fiscal 2004, 2003, and 2002, 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 does not believe, based on current facts known to management, that existing environmental laws and regulations have had or will have any material effects upon the capital expenditures, earnings, or competitive position of the company. Further, 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.

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 to 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 361 of the company’s employees are represented by collective bargaining agents, most of whom are employees of its Integrated Metal Technology, Inc., and Herman Miller Limited (U.K.) subsidiaries. As such, these subsidiaries are parties to collective bargaining agreements with these employees.

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As of May 29, 2004, the company employed 6,081 full-time and 205 part-time employees, representing a 0.5 percent decrease in full-time employees and a 0.5 percent decrease in part-time employees compared with May 31, 2003. In addition to its employee work force, the company uses 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 and Action Office systems, seating, and storage products. The company conducts business in the following major international markets: Canada, Europe, 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, the Netherlands, and the United Kingdom. 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 21, 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.

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.

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Item 2 PROPERTIES

The company owns or leases facilities located throughout the United States and several foreign countries, including Canada, France, Germany, Italy, Japan, Mexico, and the United Kingdom. The location, square footage, and use of the most significant facilities at May 29, 2004, were as follows.

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.

⁽¹⁾ Facility has been exited and marketed for sale as part of a restructuring action announced during the first quarter of fiscal 2004. This property remains listed for sale at May 29, 2004.

Item 3 PENDING LEGAL PROCEEDINGS

The company, for a number of years, has sold various products to the United States Government under GSA multiple award schedule contracts. Under the terms of these contracts, the GSA is permitted to audit the company’s compliance with the GSA contracts. The company has occasionally noted errors in complying with contract provisions. From time to time the company has notified the GSA of known instances of non-compliance (whether favorable or unfavorable to the GSA) once such circumstances are identified and investigated. The company does not believe that any of the errors brought to the GSA’s attention will adversely affect its relationship with the GSA. Currently there are no GSA audits either scheduled or in process. Management does not expect resolution of the completed audits or non-compliance notifications to have a material adverse effect on the company’s consolidated financial statements.

The company is also 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.

Item 4 SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth quarter of the year ended May 29, 2004.

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ADDITIONAL ITEM: EXECUTIVE OFFICERS OF THE REGISTRANT

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

Except as discussed in this paragraph, each of the named officers has served the company in an executive capacity for more than six years. Mr. Guy was General Manager of Operations for one of the company’s primary manufacturing operations from 1999 to 2003. Prior to this, he served as Vice President of Finance for the company’s North American operations. 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. 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.

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PART II

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

Share Price, Earnings, And Dividends Summary

Herman Miller, Inc., common stock is quoted in the NASDAQ-National Market System (NASDAQ-NMS Symbol: MLHR). As of July 30, 2004, there were approximately 18,000 shareholders of record of the company's common stock.

⁽¹⁾ For fiscal quarters ending with a reported loss, shares resulting from stock option plans would be anti-dilutive to earnings per share and have not been included in diluted earnings per share.

Dividends were declared and paid quarterly during fiscal 2004 and 2003 as approved by the Board of Directors. While it is anticipated that the company will continue to pay quarterly cash dividends, the amount and timing of such dividends is subject to the discretion of the Board depending on the company’s future results of operations, financial condition, capital requirements, and other relevant factors.

Issuer Purchases of Equity Securities

The following is a summary of share repurchase activity during the fourth quarter ended May 29, 2004.

⁽²⁾ No shares were purchased outside of a publicly announced plan or program.

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

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. No repurchase plans expired or were terminated during the fourth quarter of fiscal 2004, nor do any plans exist under which the company does not intend to make further purchases.

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Item 6 SELECTED FINANCIAL DATA

⁽¹⁾ Shown as a percent of net sales.
⁽²⁾ Retroactively adjusted to reflect two-for-one stock splits occurring in 1998 and 1997.
⁽³⁾ Amounts for 1994-2000 were restated in 2001 to reflect reclassification of certain expenses.
⁽⁴⁾ Calculated using current assets less non-interest bearing current liabilities.
⁽⁵⁾ Calculated as net earnings divided by net sales.
⁽⁶⁾     Calculated as net earnings divided by average assets.
⁽⁷⁾ Calculated as net earnings divided by average equity.

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1999			1998			1997			1996			1995			1994
$	1,828.4		$	1,773.0		$	1,543.8		$	1,325.0		$	1,117.8		$	983.7
	641.6			613.0			509.5			418.4			362.0			322.9
	379.3			370.9			335.2			299.5			287.4			230.9
	38.0			33.8			29.1			27.5			33.7			30.2
	224.3			208.3			130.7			74.9			9.1			61.8
	229.9			209.5			125.9			70.1			4.0			63.5
	141.8			128.3			74.4			45.9			4.3			40.4
	205.6			268.7			218.2			124.5			29.9			69.8
	62.1			50.7			48.0			45.0			39.7			33.2
	103.4			73.6			54.5			54.4			63.4			40.3
$	179.7		$	215.5		$	110.4		$	38.1		$	13.6		$	38.5
	3.1			14.8			16.5			18.5			13.6			11.4
	35.1			34.6			33.0			31.6			32.4			32.8
	20.7			20.9			21.7			22.6			25.7			23.5
	2.1			1.9			1.9			2.1			3.0			3.1
	12.3			11.7			8.5			5.7			0.8			6.3
	10.5			72.4			62.1			967.4			(89.4	)		82.8
	7.8			7.2			4.8			3.5			0.4			4.1
	18.5			16.7			10.3			6.8			0.7			7.9
	64.4			49.5			25.0			15.4			1.5			13.9
$	1.67		$	1.39		$	.77		$	.46		$	.04		$	.40
	.15			.15			.13			.13			.13			.13
	2.63			2.66			3.12			3.12			2.89			3.01
$	20.19		$	27.69		$	17.88		$	7.72		$	5.42		$	6.22
	84.8			92.0			96.1			100.5			99.2			101.0
$	751.5		$	784.3		$	755.6		$	694.9		$	659.0		$	533.7
	55.5			77.2			135.7			151.8			133.7			106.6
	1.0			1.1			1.4			1.6			1.2			1.3
	147.6			130.7			127.4			131.7			144.2			70.0
	209.1			231.0			287.1			308.1			286.9			296.3
	356.7			361.7			414.5			439.8			431.1			366.3

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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 the company’s Form 10-K.

Executive Business Overview

The principal focus of our business is to provide workplace solutions to our customers worldwide through the research, design, manufacture, and sale of office furniture products. These products include office furniture systems, seating, storage solutions, freestanding furniture, and casegoods. We also offer our end-user customers related services such as furniture asset management and office layout design. 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.

We consider our owned and independent dealer network one of the most important competitive factors vital to the long-term success of our business. General economic and industry conditions in recent years have placed significant financial pressure on several of our dealers. We have provided financial assistance to some dealers either through direct loans or loan guarantees. We view the primary risks to our business resulting from the dealers’ economic pressures as the potential disruption of our distribution channels, the resulting adverse impact on our customers, and the credit risk associated with our dealer financing arrangements. While we cannot avoid these risks with certainty, we believe that the overall condition of the network is stable and our reserves are adequate to cover the credit risk.

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 furniture 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 that are generally compensated on a royalty basis.

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We manufacture our products using a system of lean manufacturing techniques collectively referred to as the Herman Miller Production System (HMPS). One 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. Additionally, during fiscal years 2002 and 2003, we actively pursued a program of supplier rationalization and consolidation in an effort to reduce procurement costs and improve quality levels. Generally this effort, in connection with HMPS, has resulted in improved efficiency, costs, and reliability. Despite these benefits, the strategy does increase the risks associated with supplier transitions and dependence upon fewer suppliers. We continue to seek financially strong suppliers interested in long-term business relationships to minimize the risk of interruption to our business.

We strive to maintain efficiencies and cost savings by minimizing the amount of inventory on-hand under HMPS. Accordingly, production is order-driven with raw materials 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.

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 Canada, France, Germany, Italy, Japan, Mexico, and the Netherlands. Our products are offered elsewhere in the world primarily through independent dealerships and licensees.

We believe that respecting the environment in the way we do business is simply the right thing to do, and we are committed to developing sustainable business practices. A goal of sustainability demands that we pay attention to the entire life cycle of our products. We develop strategies that enable us to move toward sustainability while enhancing the value offered to our customers. We measure and monitor progress toward our environmental goals as a key metric of our business success.

While the office furniture industry is subject to a multitude of macro-economic influences, we generally consider the following to be the leading economic indicators of our industry’s performance:

The Business and Institutional Furniture Manufacturers 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 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

The completion of our 2004 fiscal year marks the first time in three years that we have been able to report year-over-year growth in annual sales and net earnings. It represents for us, symbolically if not statistically, the official end of an economic recession that led to the elimination of thousands of jobs across our industry. This was a difficult time in our history; however, we are pleased with the changes we made to our business model as a result of the challenge. The net effect of these changes is that we now operate as a leaner and more financially agile enterprise than we did at the beginning of the downturn. Our financial results, particularly in the second half of this year, give us confidence that overall business conditions are gaining momentum – and that we have the ability to grow profitably as a result.

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Throughout fiscal 2004, we saw improvement in a majority of the major economic indicators for our industry. Corporate profits, which began to show sequential-quarter growth last year, continued that trend during the current fiscal year ⁽¹⁾. The employment situation has also improved. Unemployment rates across most statistical categories, including general sales and office occupations, have fallen from the previous year ⁽²⁾. Finally, while new office construction rates have yet to increase, the level of office space vacancies appears to have stabilized ⁽³⁾⁽⁴⁾.

This economic data is encouraging for the industry as a whole. However, we are even more energized by what the performance of our business suggests about the recovery outlook. The fourth quarter ended May 29, 2004 represented only the second time in three years that we reported year-over-year growth in net sales. It was also the third consecutive period of year-over-year growth in quarterly order levels. In total, our fourth quarter order entry rate was the highest level experienced in the past 11 quarters. Overall business activity, as measured by client visits to our West Michigan headquarters, increased by more than 60% between the third and fourth quarters of 2004. Finally, showroom attendance at the June 2004 NeoCon® trade show in Chicago was up from the prior year.

We believe the changes made to our business model in recent years, the overall macro-economic environment, and our own sales and earnings performance during fiscal 2004 suggest a positive outlook. We are also confident that we have the resources available to fund our future capital needs. During 2004, we completed an in-depth review of our capital structure. As a result of this work, we announced a 100% increase in our quarterly cash dividend. We also received additional authorization from our Board of Directors to continue our share repurchase program.

Our markets remain intensely competitive. We have continued our product differentiation strategy to limit, to the extent possible, the impact of negative pricing pressure. Despite these efforts, price competition remains a business reality. In fiscal 2004 it reduced both net sales and gross margin in relation to the prior year.

Consistent with this differentiation strategy, we have continued to invest heavily in new product development. Our fiscal 2004 spending in the area of design and research, including royalty payments, totaled $40 million. This represents an increase both in terms of dollars and percent-of-sales from fiscal 2003 and 2002 levels.

Two innovations that gained significant attention during the year were the Mirra^TM chair and the Abak desk system. In the first quarter, we began taking orders for Mirra, the newest addition to our seating portfolio. Market acceptance of this award-winning product has been much better than we expected, and we believe our recently announced upholstered version will further enhance its popularity. The second innovation was unveiled at the June 2004 NeoCon trade show with the introduction of Abak, a freestanding desking product. This newly redesigned product, which has been successful in recent years in Europe and Asia, will be made available to our North American customers. The introduction captured significant attention and earned Abak a Gold award in the Best of NeoCon 2004 competition.

Rising material costs, particularly for raw steel, continue to be an area of concern. Increasing steel costs began to affect our business in earnest during the second half of the year. Prior to this, we were partially insulated from rising market prices by favorable pricing contracts and additional safety-stock inventory built in connection with our facility consolidation efforts. These contracts are now expired and the inventory has been used. As a result, we expect the impact of steel prices to be more significant in the near term. In fact, we estimate the negative impact of rising steel costs to be between $4 million and $4.5 million per quarter during the upcoming fiscal year.

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In response to these higher production costs, most competitors announced some form of price increase during fiscal 2004. We announced a general price increase during the fourth quarter. This change, which varies by product line but averages approximately 4% of list price, was effective August 2, 2004. Due to the ongoing business reality of price competition, however, this increase alone may not fully offset the negative impact of rising material costs in the upcoming year due to increased discounting. That said, we believe that we can cover a large portion of the increased costs through our ongoing HMPS initiatives.

On June 23, 2004, we announced that Brian Walker, then our President and Chief Operating Officer, would succeed Mike Volkema as Chief Executive Officer, effective July 26, 2004. Mike continues in his role as Board Chairman and in addition is devoting time to the Herman Miller Creative Office, assisting with commercialization of new innovations and related business development. Having served in a number of senior executive positions during his 16 years with the company, Brian brings to the CEO’s role an in-depth knowledge of our industry and a high-energy leadership style well suited to a new era. This evolution of roles maintains the continuity of a strong leadership team, enables greater focus in their respective responsibilities, and reflects a growing trend in corporate governance practice to separate the CEO and Chairman’s responsibilities.

Restructuring Activities

During the fiscal year, we completed substantially all of our outstanding restructuring initiatives. First, in the second quarter we completed the sale of the Holland, Michigan Chair Plant. Cash proceeds received from the sale totaled approximately $6 million. The sale resulted in the recognition of a $0.8 million gain, which was treated as a reduction to our second quarter restructuring expenses. We also completed the relocation of our Canton, Georgia manufacturing operation to our Spring Lake, Michigan campus. While the Canton manufacturing facility remains listed for sale, the move itself proceeded as planned and on schedule. The carrying values of the Canton assets were written down to their estimated fair market values in fiscal 2003 and remain classified under the balance sheet caption, “Net Property and Equipment.” Finally, we completed the consolidation of our Holland, Michigan Formcoat operation into existing space at one of our facilities located in nearby Zeeland, Michigan. The lease on the Formcoat facility has been terminated.

Pretax restructuring charges totaling $10.3 million, $16.4 million, and $81.6 million were recognized during fiscal years 2004, 2003, and 2002, respectively. The following is a breakdown by category of these charges.

(In Millions)

2004 restructuring expenses relating to the Canton and Formcoat moves totaled approximately $10.6 million. In addition, we recognized pension-related expenses of approximately $0.7 million associated with the workforce reduction announced late in fiscal 2003. As previously mentioned, our 2004 restructuring charges were reduced by approximately $0.8 million with the gain on the sale of the Holland Chair Plant facility. The remaining net credit for the year primarily related to adjustments to the expected sub-lease timing for facilities previously exited as part of our restructuring plan.

Cash outflows related to our restructuring activities totaled approximately $12.8 million in fiscal 2004. This compares to outflows of $14.4 million and $31.3 million in fiscal years 2003 and 2002, respectively. We expect future cash outflows, which will relate primarily to carrying costs and lease obligations on previously exited facilities, to total approximately $3 million to $3.5 million. This amount, the majority of which will likely be incurred during fiscal 2005, does not include cash proceeds from the potential future sale of our Canton facility.

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Financial Results

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

(Dollars In Millions)

⁽⁵⁾ Does not include expenses recognized in connection with our restructuring activities as these are reported on a separate line for the purposes of this analysis.

Consolidated Net Sales, Orders, and Backlog

Net sales for fiscal 2004 of $1,338.3 million were up slightly from $1,336.5 million reported in fiscal 2003. This compares to net sales in fiscal 2002 of $1,468.7 million. On a weekly basis, sales for the current fiscal year averaged $25.7 million. During the first half of fiscal 2004, sales averaged approximately $25.2 million per week. In the latter half of the year, however, the average increased to approximately $26.3 million. This change contrasts with what has historically been a second-half seasonal decline in weekly sales rates. We attribute this increase in sales activity to the fact that our backlog at the beginning of the year included an unusually high component of longer lead-time orders. Many of these orders shipped in the second half of the fiscal year. In addition, we experienced an increase in second half sales and order activity due at least in part to the general improvement in overall economic conditions.

Net trade orders totaled $1,353.4 million in fiscal 2004 compared to $1,317.9 million in 2003 and $1,446.1 million in 2002. On a weekly basis, our fiscal 2004 orders averaged approximately $26 million. The ending consolidated backlog at May 29, 2004 totaled $209.5 million. This represents an increase of 15.1% from $182.0 million at the end of fiscal 2003. The fiscal 2004 backlog includes approximately $5.5 million related to the consolidation of dealer financial statements under FIN 46 as discussed in more detail later in this report.

Domestic Operations

Domestic net sales in the current year totaled $1,123.8 million. This represents a 0.9% decline from the fiscal 2003 level of $1,134.0 million. This overall year-over-year decline was driven by a 7.2% reduction in the first half of the fiscal year. This reduction was largely offset, however, by year-over-year growth in net sales of 6.3% in the second half of fiscal 2004. In fiscal year 2002, our domestic net sales totaled $1,249.2 million.

During the first quarter of fiscal year 2004, we purchased an additional interest in our Philadelphia-based dealership, OP Spectrum LLP (Spectrum), for $0.2 million. This purchase increased our ownership stake in the entity to 90%. As a result of the transaction, we began consolidating the dealership’s financial statements in August of this fiscal year. Prior to the transaction, we accounted for our investment on the equity method, with our ownership proportion of the resulting gains or losses reported as a component of other income/expense. The consolidation of Spectrum increased our fiscal 2004 net sales by approximately $12.3 million.

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The competitive pricing environment has continued to pose a significant challenge to our efforts to increase the top line. Fiscal 2004 net sales were reduced from the prior year level by an incremental increase in domestic discounting of $17.7 million. The comparable impact of higher discounting in fiscal years 2003 and 2002 totaled approximately $18 million and $21.1 million, respectively.

New orders for our domestic operations totaled $1,135.4 million in fiscal 2004. This compares to orders of $1,117.0 million in the prior year and represents a year-over-year increase of approximately 1.6%. Orders in fiscal 2002 totaled $1,221.6 million.

By comparison, BIFMA reported an estimated year-over-year increase in U.S. office furniture shipments of approximately 0.9% for the twelve-month period ended May 2004. For the same period, BIFMA estimates industry orders grew approximately 3.9%.

International Operations and Exports from the United States

Our international results were a highlight for the year. Net sales totaled $214.5 million representing an increase of 5.9% from our fiscal 2003 level of $202.5 million. In fiscal year 2002, our international net sales totaled $219.5 million. We experienced year-over-year sales increases in almost all international regions. The exceptions to this were our operations in Mexico, which experienced unusually high sales in the prior year attributable to a few large project wins, and Central Europe, which continues to be depressed by a difficult economy. Our sales growth in the current year was particularly significant in the Asia-Pacific region, especially Japan and Australia. We also experienced strong growth in our export business to Spain and the Middle East. In total, sales from our international operations represented approximately 16.0% of our consolidated net sales in fiscal 2004. This compares to 15.2% in fiscal 2003 and 14.9% in fiscal 2002.

Our sales performance in international benefited from changes in foreign currency exchange rates during the year. The relative weakening of the U.S. dollar increased the U.S. dollar value of our international sales by approximately $15.7 million compared to what this value would have been at prior year exchange rates. It is important to note that these changes in exchange rates generally have a similar effect on our international cost structure: The U.S. dollar value of our international expenses increased relative to prior year levels as a result of the weakening U.S. dollar.

For the second consecutive year, our international operations posted positive net earnings. Net earnings for fiscal 2004 were $3.2 million compared with $3.0 million last year and a net loss of $7.5 million in fiscal 2002.

Gross Margin

Our fiscal 2004 gross margin, as a percent of net sales, totaled 31.1%. This compares to 31.7% in fiscal 2003 and 30.0% in fiscal 2002. The current year decline from the 2003 level is attributable to several factors. First, as mentioned, increased price discounting from the prior year had a significant negative impact on our financial results. This alone reduced our gross margin percentage by 1.3 points. Other significant factors include increasing material costs, labor inefficiencies resulting from the relocation of the Canton operation, and higher current year incentive bonuses. These negative factors in the current year were offset to some extent by a reduction in manufacturing overhead expenses.

In comparison to the prior year, our fiscal 2004 direct material costs increased on both a dollar and percent-of-sales basis. The biggest reason for this increase as a percentage of sales was price discounting. While unit volume sales in 2004 were higher than the prior year, the revenue generated from those sales was depressed due to competitive price discounting. The result of this is higher total expenses for direct materials on nearly the same sales dollars. This was further compounded during the year as we began to experience significant increases in the cost of certain direct materials. This was not only the case for raw steel, which in total negatively affected gross margin by approximately $1.7 million for the year, but also resulted from the impact of higher oil prices on petroleum-based components such as plastics.

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Direct labor expenses in fiscal 2004 increased slightly as a percent of sales when compared to the prior year. As we had expected, the closure and relocation of our Canton, Georgia operation resulted in short-term labor inefficiencies. As this transition effort was ongoing for most of the fiscal year, we experienced the increased costs over that same time. The Canton move is now complete, and beginning in the fourth quarter of this year, we began to realize some of the expected labor and overhead benefits resulting from this move.

Our manufacturing overhead expenses, both in dollar and percent-of-sales terms, were lower in fiscal 2004 compared to the prior year. This reduction, which totaled approximately $2.3 million, was achieved despite an increase in current year incentive bonus expenses of approximately $5.1 million. Pretax variable compensation expense included in our fiscal 2004 cost of sales totaled $6.1 million compared to $1.0 million in 2003. In fiscal 2002, we recognized credits of $(0.9) million related to the reduction of variable compensation accruals that had been established in a prior period.

Operating Expenses and Operating Earnings

We continue to demonstrate year-over-year improvement in operating expenses. In fiscal 2004, total operating expenses were $354.4 million compared to $375.3 million in the prior year and $520.2 million in 2002. These amounts include restructuring expenses as previously described as well as selling, general, and administrative (SG&A) charges of $304.1 million, $319.8 million, and $399.7 million, respectively. Design and research costs included in total operating expenses were $40.0 million, $39.1 million, and $38.9 million for 2004, 2003, and 2002, respectively.

The decline in SG&A expense from fiscal 2003 of $15.7 million or 4.9% was primarily the result of lower overall compensation, benefit, and depreciation expenses. The majority of these savings are a direct result of our restructuring actions in recent years. We also experienced a reduction in customer bad debt expenses in the current year as compared to fiscal 2003. This reduction resulted from an overall improvement in the aging of our accounts receivable, which reduced the level of required reserves in the current year. Partially offsetting these declines were increased current year expenses totaling $3.6 million resulting from the consolidation of OP Spectrum.

Our fiscal 2002 SG&A expenses included a pretax charge totaling $4.3 million related to a legal judgment from a 1999 lawsuit. Early in fiscal 2004, we received a favorable court ruling on the matter. Accordingly, we reduced our 2004 SG&A expenses by $5.2 million from the reversal of the related legal and interest accruals.

Pretax variable compensation expense/(credits) included in our current year operating expenses totaled $9.4 million. This compares to $3.7 million last year and $(3.1) million in fiscal 2002. The credits recognized in 2002 related to the reduction of incentive bonus accruals that were established in a prior period.

Our fiscal 2002 operating expenses included $15.6 million in charges from the accelerated depreciation of certain technology-related assets. Also included in that year was approximately $3.1 million in goodwill asset amortization expense. Under an accounting rule that became effective in fiscal 2003, amortization expense of goodwill assets is no longer recognized.

Expenses for design and research within total operating expenses include royalty payments paid to designers of our products as the products are sold. These payments, which totaled $5.4 million, $5.8 million, and $5.0 million, in fiscal years 2004, 2003, and 2002, respectively, are considered to be variable costs of the products being sold. Accordingly, we do not consider them research and development costs as discussed in Note 1 of the Consolidated Financial Statements

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Operating earnings in fiscal year 2004 of $61.2 million improved by $12.9 million over our fiscal 2003 level. On a percent-of-sales basis, operating earnings totaled 4.6% in fiscal 2004 compared to 3.6% in 2003. In fiscal 2002, we posted an operating loss of $79.9 million or negative 5.4% of net sales.

Other Expenses and Income

Net other expenses totaled $9.6 million in fiscal 2004 compared to $12.5 million in 2003 and $11.1 million in 2002. The year-over-year decline between 2003 and 2004 was caused primarily by an accounting charge related to our investment in Spectrum as discussed below. Lower current year interest charges also contributed to the decline. Changes in foreign exchange rates and the resulting transaction gains between years partially offset the decline.

During 2003, we recognized a $2.2 million pretax charge related to the impairment of our equity investment in Spectrum. As previously discussed, we increased our ownership stake in this dealer during the first quarter of this year, and its financial statements are now being consolidated.

Interest expense in the current year was $1.6 million lower than in 2003. Lower year-over-year debt levels and increased savings resulting from our interest rate swap arrangements were the reason for this decline.

Finally, we recorded a foreign currency transaction gain in fiscal 2004 of $0.1 million compared to $0.9 million in the prior year.

Income Taxes

In the fourth quarter of 2004, we recorded a benefit from the release of tax reserves totaling $6.9 million. These reserves were released as a result of the closure of IRS audits for the years 1999, 2000, and 2001. As a result of this adjustment, we reported a 17.1% effective tax rate for the full fiscal year. Excluding the impact of this reserve adjustment, our effective tax rate for the year totaled 30.3%. This adjusted rate was lower than our earlier estimates for the full year due to year-end state tax true-ups on the actual full year results. We expect our long-term effective tax rate to be approximately 36%. Our effective tax rate was 34.9% in fiscal 2003 and 38.5% in 2002.

Cumulative Effect of Accounting Change

We adopted the revised provisions of Financial Accounting Standards Board Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46(R)) at the end of fiscal 2004. This new accounting standard broadens the requirements for determining whether a company is required to consolidate the financial statements of another entity. In adopting FIN 46(R), we determined the need to consolidate the financial statements of two independent contract furniture dealerships to which we have provided ongoing financial support through loans and/or financial guarantees.

As a result of this consolidation, we recorded 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 the current fiscal year, the consolidation had no material impact on our fiscal 2004 Consolidated Statement of Operations beyond that of the cumulative effect. In the future, the results of operations of these two dealers will be included in our Consolidated Statement of Operations. The effect of adoption on our Consolidated Balance Sheet as of May 29, 2004, was an increase to assets of approximately $2.0 million and liabilities of $2.6 million. Refer to Note 4 of the Consolidated Financial Statements for additional information on FIN 46(R).

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Change in Accounting Principle

At the beginning of fiscal 2004, we converted a portion of our remaining FIFO-based domestic inventories to LIFO for inventory valuation purposes. Due to the facility rationalization and consolidation resulting from our restructuring activities in recent years, we determined it was more appropriate to account for these inventories using the LIFO method. There was no cumulative effect of this change in accounting principle, and the impact on our fiscal 2004 results was not material.

Net Earnings

Net earnings totaled $42.3 million in fiscal 2004 or $0.58 per share after the impact of the cumulative effect of accounting change. This compares to net earnings of $23.3 million or $0.31 per share in 2003. In fiscal 2002, we reported a net loss of $56.0 million or $0.74 per share. The per-share impact of restructuring charges recognized during fiscal years 2004, 2003, and 2002 totaled approximately $0.09, $0.14, and $0.68, net of taxes, respectively.

Liquidity and Capital Resources

The table below presents certain key cash flow and capital highlights.

⁽⁶⁾ Beginning in fiscal 2003, outstanding letters of credit were applied against our unsecured credit facility. Accordingly, the amounts shown for 2003 and 2004 are net of these letters of credit.

Interest-bearing debt totaled $207.2 million at the end of fiscal 2004 compared to $223.0 million in 2003 and $235.1 million in 2002. The current year amount includes $1.5 million related to debt obligations of the entities consolidated under FIN 46. Outstanding standby letters of credit at the end of fiscal years 2004 and 2003 totaled $13.8 million and $11.0 million, respectively. These letters of credit represented the only usage against our unsecured revolving credit facility as of those dates. We were in compliance with all provisions of our debt covenants throughout the past three fiscal years.

During the current year, we entered into two interest-rate swap arrangements to convert a total of $65 million of fixed-rate debt to a variable-rate basis. These new arrangements are in addition to a previous swap transaction entered into at the end of fiscal 2002. As of the end of fiscal 2004, the portion of our total interest-bearing debt that was effectively converted to a variable-rate basis through these arrangements totaled $82 million. Interest expense savings resulting from the swap arrangements totaled approximately $1.6 million in fiscal 2004 and $0.9 million in fiscal 2003.

Average 12-month days sales outstanding (DSO) in accounts receivable and inventory totaled 51.0 at the end of fiscal 2004 compared to 52.2 in the prior year and 59.6 in 2002. During fiscal 2004, we experienced relatively strong collections and a general improvement in our accounts receivable aging categories. Our gross accounts receivable balance at May 29, 2004 increased approximately $12.0 million or 8.7% from the end of fiscal 2003. This was driven mainly by increased sales activity in the current year fourth quarter. This is also the primary reason for the year-over-year increase in gross inventories.

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The recorded allowance for non-collectible accounts, as a percent of gross accounts receivable, totaled 5.4%, 9.3%, and 10.3% as of the end of fiscal 2004, 2003, and 2002, respectively. The reduction in the current year percentage is attributable to the overall improvement in the quality of our accounts receivable aging.

Cash Flow –Operating Activities

Cash flow generated from operating activities totaled $82.7 million in the current year. This compares to $144.7 million in 2003 and $54.6 million in 2002. The decline in cash flow of $62.0 million between fiscal 2003 and 2004 relates primarily to tax refunds received in the prior year as well as a significant shift in working capital balances.

Federal tax refunds received during fiscal 2003 increased cash flow by $42.8 million. These refunds related mainly to net operating losses generated in fiscal year 2002. By comparison, we received federal refunds of only $5.7 million in the current year.

As a reminder, in fiscal 2003 we made cash payments totaling $20.4 million for taxes and interest related to our 2002 settlement with the IRS concerning our COLI program. These payments reduced operating cash flows, partially offsetting the favorable changes in working capital balances discussed below.

From a working capital perspective, we received a much larger cash flow benefit in fiscal 2003 as compared to the current year. Most of this benefit was driven by a significant increase in accrued income taxes and declines in accounts receivable and inventory balances between 2002 and 2003. By contrast, in fiscal 2004 these working capital balances moved in the opposite direction resulting in a year-over-year decrease in accrued income taxes and increases in both accounts receivable and inventories. These negative factors were partially offset in 2004 by a production-driven increase in accounts payable, higher relative compensation and benefit accruals, and favorable changes in deferred taxes.

We made cash contributions to our employee pension funds totaling $28.3 million in fiscal 2004. In fiscal years 2003 and 2002, such contributions totaled $32.1 million and $37.4 million, respectively. These payments reduced operating cash flows in each of these years. Subsequent to the end of fiscal 2004, in July 2004, we made additional cash contributions totaling $23 million to our domestic employee pension plans.

Again in fiscal 2004, we incurred operating cash outflows related to our restructuring activities. Cash payments in the year totaled $12.8 million. We made similar cash payments in 2003 and 2002 totaling $14.4 million and $31.3 million, respectively.

Cash Flow –Investing Activities

Cash outflows for investing activities in fiscal 2004 totaled $21.9 million and were driven primarily by capital expenditures offset by proceeds from the sale of fixed assets. These same factors combined in fiscal 2003 to generate the majority of the $7.3 million outflow in that year. In fiscal year 2002, cash outflows totaling $25.8 million, which related mainly to capital expenditures, were offset by a $14.0 million cash receipt from the net surrender value of our COLI policies.

Capital expenditures in the current year totaled $26.7 million; down slightly from $29.0 million in fiscal 2003. In fiscal 2002, our spending was substantially higher in this area totaling $52.4 million. We have made significant progress in recent years adjusting our annual capital spending to be in line with business levels. We will continue to carefully monitor and challenge our spending in this area while at the same time taking care not to eliminate investments that are important to the long-term success of our operations and overall strategy.

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As of the end of fiscal 2004, we had outstanding commitments for future capital purchases of approximately $2.7 million. We expect fiscal 2005 capital expenditures to total between $40 million and $50 million.

During the second quarter of fiscal 2004, we completed the sale of our Holland, Michigan Chair Plant. This facility was exited in connection with our restructuring plan, and its sale generated net proceeds of approximately $6.0 million. In fiscal 2003, we received proceeds totaling $20.2 million from the sale of our Rocklin, California and West-Michigan Powder Coat Technology facilities. Both of these facilities were exited in connection with prior restructuring actions.

Cash Flow – Financing Activities
(In Millions, Except Share and Per Share Data)

Cash outflows for financing activities totaled $60.0 million in fiscal 2004 compared to $82.2 million in 2003 and $42.2 million in 2002.

As was the case in 2003, share repurchases in the current year accounted for a majority of the outflows in this category. In 2004, we repurchased fewer shares than in the prior year; however, they were acquired at a significantly higher weighted average cost. This resulted in essentially the same total cash outflow for repurchases between years. During the current year, our Board of Directors gave us approval to continue our share repurchase program with an additional $100 million authorization limit. As of the end of fiscal 2004, we had approximately $89.7 million available on our authorization to be used for future share repurchases. We continue to believe this is an effective means of returning value to our shareholders.

During fiscal 2004 we received cash totaling $27.4 million related to the issuance of our common stock. This was driven mainly by the exercise of stock options, the volume of which increased significantly from last year presumably due to the current year increase in our stock price. In fiscal 2003, cash received from the issuance of stock totaled only $3.9 million and related primarily to issuances in connection with employee benefit plans.

Repayments of long-term debt totaled $14.8 million in fiscal 2004. The majority of this related to the current year scheduled payment on our private placement notes. We also repaid approximately $1.8 million in remaining debt related to a prior dealer acquisition. In fiscal 2003, repayments totaled $13.4 million with the majority again related to the private placement. Also included in our 2003 repayments was approximately $2.8 million related to short-term bank debt associated with our former Australian business. Debt repayments in fiscal 2002 were $25.6 million. Our next scheduled debt repayment totals $13.0 million and will be made in the fourth quarter of fiscal 2005.

We paid cash dividends of $10.6 million, $10.8 million, and $11.0 million during fiscal 2004, 2003, and 2002, respectively. In April 2004, we announced a 100% increase in our quarterly dividend rate bringing it to $0.0725 per share. We will begin paying at this new rate in the first quarter of fiscal 2005.

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

Contingencies

The company, for a number of years, has sold various products to the United States Government under General Services Administration (“GSA”) multiple award schedule contracts. Under the terms of these contracts, the GSA is permitted to audit the company’s compliance with the GSA contracts. The company has occasionally noted errors in complying with contract provisions. From time to time the company has notified the GSA of known instances of non-compliance (whether favorable or unfavorable to the GSA) once such circumstances are identified and investigated. The company does not believe that any of the errors brought to the GSA’s attention will adversely affect its relationship with the GSA. Currently no GSA audits are either scheduled or in process. Management does not expect resolution of the completed audits or non-compliance notifications to have a material adverse effect on the company’s consolidated financial statements.

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On March 19, 2003, a settlement was reached in mediation concerning an audit of the company’s compliance with its international GSA contract for the years 1991, 1992, and 1993. The terms of the settlement required the company to pay $0.6 million to the United States Government. This payment was made during the fourth quarter of fiscal 2003. The financial impact of this settlement was previously reserved for, and consequently, it had no impact on fiscal 2003 net earnings.

The company is also 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 effect the company’s consolidated financial statements.

Basis of Presentation

Fiscal years 2004, 2003, and 2002 each contained 52 weeks. This is the basis upon which all of the above weekly average data is presented.

Contractual Obligations

Contractual obligations associated with our ongoing business and financing activities will result in cash payments in future periods. The following table summarizes the amounts and estimated timing of these future cash payments. Further information regarding debt obligations can be found in Note 10 of the Consolidated Financial Statements. Likewise, further information related to operating leases can be found in Note 11.

(In Millions)

⁽⁷⁾ Amounts indicated do not include the recorded fair value of interest rate swap instruments.
⁽⁸⁾ Estimated future interest payments on our outstanding debt obligations are based on interest rates as of May 29, 2004. Actual cash outflows may differ significantly due to changes in underlying interest rates and timing of principal payments.
⁽⁹⁾ Purchase obligations consist of non-cancelable purchase orders and commitments for goods, services, and capital assets.
⁽¹⁰⁾ Pension funding commitments are defined as the expected minimum funding requirements and planned voluntary contributions to be made in the following 12-month period. As of May 29, 2004, the total accumulated benefit obligation for our domestic and international employee pension benefit plans was $277.2 million.
⁽¹¹⁾ Represents the recorded dividend payable as of May 29, 2004. Future dividend payments are not considered contractual obligations until declared.
⁽¹²⁾ Other contractual obligations represent long-term commitments related to deferred employee compensation benefits, minimum designer royalty payments, and scheduled commitments related to the acquisition of intellectual property rights.
⁽¹³⁾     Total balance is reflected as a liability in the Consolidated Balance Sheet at May 29, 2004.

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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 20 of the Consolidated Financial Statements.

Variable Interest Entities

On occasion, we provide financial support to certain dealers in the form of term loans, lines of credit, and/or loan guarantees. At May 29, 2004, we were considered the primary beneficiary of two such relationships due to the nature of our variable interests in these entities as further discussed in Note 4 of the Consolidated Financial Statements. In addition to these, we also hold variable interests in other dealerships where we are not the primary beneficiary. The risks and rewards associated with our interests in these other dealerships are primarily limited to our outstanding loans and guarantee amounts. At May 29, 2004, the company’s maximum exposure to any potential losses related to financing provided to such entities in the form of term loans and/or lines of credit totaled $1.3 million. Information on our exposure related to outstanding loan guarantees provided to such entities is included in Note 20 of the Consolidated Financial Statements.

Critical Accounting Policies

We strive 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. Following is a summary of our more significant accounting policies that require the use of estimates and judgments in preparing the financial statements.

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 receivables. In addition to known or judgmental components of our allowances, 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 $8.1 million and $12.9 million at May 29, 2004 and May 31, 2003, respectively. This year-over-year reduction is attributable to the overall improvement in the quality of our accounts receivable aging. The notes receivable allowance totaled $1.4 million and $4.4 million at May 29, 2004 and May 31, 2003, respectively. This year-over-year reduction is primarily attributable to the elimination of intercompany balances with OP Spectrum LLP consolidated upon the acquisition as further described in Note 2 and with certain dealerships consolidated upon the adoption of FIN 46(R) as further described in Note 4 of the consolidated financial statements.

Goodwill

The net carrying value of our goodwill at May 29, 2004 totaled $39.1 million. Beginning in fiscal year 2003, we ceased recognizing amortization expense on these goodwill assets in accordance with the accounting guidance in Statement of Financial Accounting Standards No. 142. Under this new rule, 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.

We performed this test in the fourth quarter of fiscal 2004 and determined that no impairment exists. Our estimate of reporting unit fair value was based on discounted cash flows. Accordingly, we were required to make certain assumptions regarding future profitability and cash flows. It also required us to use an assumed discount rate, which we set at 10%. We believe this level is conservative in that it exceeds our estimated weighted average cost of capital. Changes to the discount rate used in this analysis have a significant impact on the results of the impairment test. Our analysis indicates that we could increase this discount rate by more than 2 full percentage points before the results of the test indicated impairment.

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Warranty Reserve

We stand behind our products and keep our promises to customers. From time to time, issues arise resulting in the need to incur costs to correct or replace 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 of certain subsidiaries are valued using the last-in, first-out (LIFO) method. The inventories of other subsidiaries are valued using first-in, first-out method. We establish reserves for excess and obsolete inventory, based on material movement and a component of 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. Future tax benefits for NOL carryforwards 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. 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 established 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 claim experience can vary. We maintain certain insurance coverage for 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 used in calculating such amounts. Among the most significant of these assumptions are the discount rate, expected long-term rate of return on plan assets, and expected rate of increases in compensation and healthcare costs. These assumptions are reviewed annually based on internal and external factors. Adjustments to the assumptions could result in changes to the future expense and liabilities. Refer to Note 12 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.

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New Accounting Standards

In May 2003, the Emerging Issues Task Force issued its consensus on Issue No. 03-04, “Determining the Classification and Benefit Attribution Method for a ‘Cash Balance’ Pension Plan” (EITF 03-04). In this consensus, the Task Force concluded that the actuarially determined pension expense for cash balance plans that have fixed-interest credit rates and are not pay-related, be determined using the traditional unit credit method of accounting. The company adopted the provisions of EITF 03-04 effective at the beginning of the first quarter of fiscal 2004. The adoption of EITF 03-04 did not have a material impact on the company’s consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” (SFAS 150). SFAS 150 modified the traditional definition of “liabilities” to encompass certain obligations that must be settled through the issuance of equity shares. These obligations are considered liabilities as opposed to equity or mezzanine financing under the provisions of SFAS 150. In addition, SFAS 150 increased the required disclosures of alternate settlement methods related to these obligations. This new standard was effective immediately for financial instruments entered into or modified after May 31, 2003 and for all other financial instruments beginning in the second quarter of fiscal 2004. The adoption of SFAS 150 did not have an impact on the company’s consolidated financial statements.

In May 2003, the Emerging Issues Task Force issued its consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (EITF 00-21). In this consensus, the Task Force addressed certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. The company adopted the provisions of EITF 00-21 effective at the beginning of the second quarter of fiscal 2004. The adoption of EITF 00-21 did not have a material impact on the company’s consolidated financial statements.

In December 2003, the FASB issued a revision to Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46(R)). This new rule requires that companies consolidate a variable interest entity if the company is deemed the primary beneficiary subject to a majority of the risk of loss from the variable interest entity’s activities, or is entitled to receive a majority of the entity’s residual returns, or both. The company has no special purpose entities, as defined, nor has it acquired a variable interest in an entity where the company is the primary beneficiary since January 31, 2003. The provisions of FIN 46(R) are required to be applied as of the end of the first reporting period that ends after March 15, 2004 for the variable interest entities in which the company holds a variable interest that it acquired on or before January 31, 2003. The company adopted FIN 46(R) at end of the fourth quarter of fiscal 2004. Refer to Note 4, Variable Interest Entities, for further discussion.

In December 2003, the FASB issued SFAS No. 132 revised 2003, “Employers’ Disclosures about Pensions and Other Postretirement Benefits” (SFAS 132(R)). This standard increases the existing disclosure requirements by requiring more details about pension plan assets, benefit obligations, cash flows, benefit costs and related information. Companies will be required to segregate plan assets by category, such as debt, equity and real estate, and to provide certain expected rates of return and other informational disclosures. SFAS 132(R) also requires companies to disclose various elements of pension and post-retirement benefit costs in interim-period financial statements for quarters beginning after December 15, 2003. The company adopted the additional annual disclosure provisions of SFAS 132(R) in the fourth quarter of fiscal 2004. Refer to Note 12, Employee Benefit Plans, for further disclosures regarding pension and other post-retirement benefits.

In March 2004, the Emerging Issues Task Force issued a consensus on Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (EITF 03-01). In this consensus, the Task Force required certain quantitative and qualitative disclosures related to debt and marketable equity securities classified as available-for-sale or held-to-maturity under SFAS 115 that are in an unrealized loss position at the balance sheet date but for which an other-than-temporary impairment has not been recognized. In addition, the Task Force developed a basic model in evaluating whether investments within the scope of EITF 03-01 have other-than-temporary impairment. The company adopted provisions of EITF 03-01 in the fourth quarter of fiscal 2004. Adoption of EITF 03-01 did not have a material impact on the company’s consolidated financial statements. Refer to Note 1, Significant Accounting and Reporting Policies, for further disclosures regarding short-term investments.

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In May 2004, the FASB issued Staff Position No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (FSP 106-2) in response to the Act that was signed into law on December 8, 2003. The Act introduced a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree healthcare plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. The provisions of FSP 106-2 provide guidance on the accounting treatment and required disclosures relating to the effects of the Act. This guidance supersedes FASB Staff Position No. 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (FSP 106-1). Currently, specific regulatory guidance does not exist regarding how to determine whether a plan is considered actuarially equivalent, a key criterion under FSP 106-2. Accordingly, the company is currently in the process of evaluating existing plan benefits to determine actuarial equivalency and the corresponding impact of the FSP on the financial statements. The company expects to adopt the provisions of FSP 106-2 in the second quarter of fiscal 2005.

Forward-Looking Statements

This discussion and other sections of our Annual Report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act, as amended, that are based on management’s beliefs, assumptions, current expectations, estimates, and projections about the office furniture industry, the economy, and the company itself. Words like “anticipates,” “believes,” “confident,” “estimates,” “expects,” “forecasts,” “likely,” “plans,” “projects,” “should,” variations of such words, and similar expressions identify such 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, extent, likelihood, and degree of occurrence. Therefore, actual results and outcomes may materially differ from what we express or forecast. Furthermore, Herman Miller, Inc., undertakes no obligation to update, amend, or clarify forward-looking statements.

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Item 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Favorable foreign currency fluctuations during fiscal 2004 resulted in increased earnings from continuing operations before income taxes of $0.1 million. Additionally, the accumulated other comprehensive loss component of total shareholders’ equity was reduced during fiscal 2004 by $3.4 million as a result of these changes. By comparison, currency fluctuations in fiscal 2003 resulted in increased pretax earnings of $0.9 million and reduced accumulated other comprehensive loss by $7.7 million. Because the company conducts business internationally, it will continue to be subject to related currency exchange rate fluctuations.

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 three separate interest rate swap agreements that effectively convert $82 million in total of fixed-rate debt to a variable-rate basis at the end of the fiscal year. This debt is subject to changes in interest rates, which 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 major 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 swap arrangements resulted in the reduction of net interest expense by approximately $1.6 million and $0.9 million in fiscal years 2004 and 2003, respectively. In fiscal 2002, the effect on net interest expense was not material. As of May 29, 2004, the swap instruments had a combined negative fair value of approximately $1.3 million. All cash flows related to the company’s interest rate swap agreements are denominated in U.S. dollars. For further information, refer to Fair Value of Financial Instruments and Financial Instruments with Off-Balance-Sheet Risk in Notes 17 and 18 to the Consolidated Financial Statements.

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

⁽¹⁾ Amount does not include the recorded fair value of the swap instruments, which totaled $(1.3) million at the end of fiscal 2004.

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Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Quarterly Financial Data

Summary of the quarterly operating results on a consolidated basis for the years ended May 29, 2004, May 31, 2003, and June 1, 2002.

⁽¹⁾ Effective May 29, 2004, the Company adopted FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46(R)). For further information, refer to Note 4 of the Consolidated Financial Statements filed as part of this report.
⁽²⁾ For fiscal quarters ending with a reported loss, shares resulting from stock option plans would be anti-dilutive to earnings per share and have not been included in diluted earnings per share.
⁽³⁾ Sum of the quarters does not equal the annual balance reflected in the Consolidated Statements of Operations due to rounding.
⁽⁴⁾; The fourth quarter of fiscal 2004 was benefited by the release of tax reserves totaling $6.9 million. For further information, refer to Note 16 of the Consolidated Financial Statements filed as a part of this report.

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Consolidated Statements Of Operations
(In Millions, Except Per Share Data)

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Consolidated Balance Sheets
(In Millions, Except Share and Per Share Data)