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Herman Miller Reports Flat Sales In Fourth Quarter

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Herman Miller, Inc.  announced results for its fourth quarter and fiscal year ended May 29, 2010. Consolidated orders in the fourth quarter of $364.5 million increased 12.5% from the same period last year, with the largest percentage gains coming from the company's international, healthcare, learning, and retail vertical markets. Relative to the third quarter of this fiscal year, consolidated orders improved 25.7%, driven by strong seasonal demand increases throughout most areas of the business. Net sales for the fourth quarter of $321.5 million were flat with the prior year, and down 2.5% on a sequential basis relative to the third quarter. Excluding pretax restructuring and impairment expenses of $9.6 million, adjusted diluted earnings per share in the fourth quarter totaled $0.10, compared to $0.20 in the same quarter last year. Including the impact of these expenses, diluted earnings per share were $0.00 in the fourth quarter compared to $0.14 last year.

For the full fiscal year, net sales totaled $1,318.8 million, reflecting a decrease of 19.1% from the fiscal 2009 level. Adjusted diluted earnings per share in fiscal 2010 were $0.66, which excludes the impact of restructuring and impairment charges and first quarter costs related to the early retirement of debt obligations. This compares to $1.59 per share in the prior fiscal year on an adjusted basis. Including the effects of these expenses, diluted earnings per share in fiscal 2010 were $0.43 compared to $1.25 in fiscal 2009.

Herman Miller reported strong cash generation in the fourth quarter, with cash flow from operations totaling $36.3 million compared to $27.3 million last year. For the full fiscal year, cash flow from operations was $99.1 million compared to $91.7 million in fiscal 2009.

Brian Walker, Chief Executive Officer, stated, "The order volume we achieved this quarter represents the highest level of new business we have seen in 18 months. This ramp-up in orders was experienced across virtually all areas of our business - driving double-digit percentage growth both on a sequential and year-over-year basis. It's another signal that we are turning the corner in an economy that still faces challenging questions. These results, along with the exciting new products we introduced last week in Chicago, contribute to a renewed sense of momentum in our business."

Fourth Quarter 2010 Financial Results

New orders in the fourth quarter within Herman Miller's North American business segment increased 10.5% from the prior year period, while non-North American segment orders increased 22.7%. Net sales in the North American business segment were $252.2 million in the fourth quarter, representing a decrease of 6.0% from the same period last fiscal year. The company's non-North American business segment reported sales of $58.6 million in the fourth quarter, an increase of 32.9% from a year ago.
During the fourth quarter, Herman Miller acquired Colebrook Bosson Saunders (CBS), a worldwide leader in the design, manufacture, and distribution of ergonomic work tools. CBS's headquarters are located in London, England, with additional showrooms in New York and Australia. The acquisition was completed on April 6 and had an initial net cash purchase price of approximately $13 million. The products offered by CBS enhance the scale of Herman Miller's existing ergonomic product offering, the combination of which is now marketed under the Thrive(SM) portfolio. The consolidation of CBS in the fourth quarter contributed approximately $3 million in sales and orders to Herman Miller's fourth quarter results.

Also during the quarter, the company completed an asset purchase of Living Edge Group Pty. Ltd., an independent office furniture dealer with locations throughout Australia. In April, the dealer's lending institution withdrew its financial support and appointed a third-party receiver to manage an ownership transition. On May 3, Herman Miller purchased certain assets of the business and assumed control of its operations. The purchase price of these assets, primarily inventory and fixed assets, was approximately $3 million. Incremental sales and orders from Living Edge in the company's consolidated fourth quarter were approximately $0.6 million and $0.8 million, respectively.

Gross margin in the fourth quarter was 32.8% compared to 32.5% last year and 31.8% in the third quarter of this year. Savings generated by the company's restructuring efforts helped drive the year-over-year margin improvement and were partially offset by cost increases in the current quarter for key commodities such as aluminum and steel. On a sequential-quarter comparison, the 100-basis-point increase in gross margin resulted from the completion of two separate factory consolidation projects, which yielded improved direct labor efficiencies in the quarter. The fourth quarter gross margin also benefited from improved cost absorption driven by higher factory production levels in relation to the third quarter.

Operating expenses in the fourth quarter of $91.7 million increased $6.7 million from the prior year period. Approximately $5 million of the increase relates to bad debt expenses recognized in connection with the write-off of receivables from the Living Edge dealership. The company also recorded incremental ongoing operating expenses totaling approximately $1.8 million related to the consolidation of CBS and Living Edge in the quarter. Herman Miller's fiscal year 2010 fourth quarter expenses also include approximately $4.8 million from the consolidation of Brandrud and Nemschoff. These expense increases were partially offset in the quarter by favorable adjustments related to the contingency-based components of the Nemschoff purchase price. These adjustments resulted in a $3.7 million reduction to operating expenses in the period.

On a sequential-quarter basis, operating expenses in the fourth quarter increased $6 million from the third quarter of this fiscal year. The bad debt charges associated with Living Edge and operating expenses from the newly consolidated acquisitions were the primary contributors to this increase.

Herman Miller's fourth quarter results include pre-tax restructuring and impairment expenses totaling $9.6 million, most of which relate to the company's previously announced factory consolidation projects and severance benefits for incremental headcount reductions.

Greg Bylsma, Chief Financial Officer, stated, "We reported strong sequential order growth this quarter, with a majority of the improvement occurring in the final seven weeks of the period. As a result, much of this improved order activity did not get recognized as revenue in the quarter. Rather, it is reflected in our ending backlog, which increased 26% from the February level. The operating expense impact of the dealership transition in Australia was clearly a negative in the quarter, but we are confident the improvements now being made in that business will result in a continued strong market presence. We posted solid cash flow generation during the quarter, which drove an increase in cash and investments in the period despite the outflows incurred in completing the acquisitions."

The company recognized a consolidated income tax benefit of $2.3 million against a $0.2 million net loss before tax in the fourth quarter. This related principally to the release of income tax reserves triggered by the closure of an IRS audit of the company's fiscal 2009 tax return, combined with benefits received from the manufacturer's deduction under the 2004 American Jobs Creation Act. The effective tax rate in the prior year fourth quarter was 1.3%, driven by tax credits generated from the repatriation of foreign cash and benefits related to the R&D tax credit. For the full 2010 fiscal year, Herman Miller's effective tax rate was 18.8%, compared to 31.4% in fiscal 2009.

The company's cash position at the end of the quarter was $134.8 million, down from $192.9 million at the end of fiscal 2009, and up $11.7 million from the February 2010 level. The reduction from the prior year-end was driven principally by first quarter cash outflows associated with the early retirement of debt securities and the Nemschoff acquisition. Capital spending in the fourth quarter was $7 million, up from last year's level of $5 million. For the full year, capital expenditures totaled $22.3 million compared to $25.3 million in fiscal 2009.

Mr. Walker concluded, "One of the hallmarks of our company's history has been the ability to emerge from challenging periods with transformational products and processes. I believe our commitment to new products and market development over the past two years has put us in a position to do this once again. Throughout this period, we remained focused on maintaining near-term profitability while at the same time investing for the future. The award-winning new products we introduced last week at the NeoCon tradeshow are a testament to that focus, and I am incredibly proud of the collective spirit it has taken at Herman Miller to make this happen."

About Herman Miller: Herman Miller works for a better world around you--with inventive designs, technologies and related services that improve the human experience wherever people work, heal, learn, and live. Its curiosity, ingenuity, and design excellence create award-winning products and services, resulting in more than $1.3 billion in revenue in fiscal 2010. Innovative business practices and a commitment to social responsibility have also established Herman Miller as a recognized global company. In 2010, Herman Miller was again cited by FORTUNE as the "Most Admired" in its industry and among the "100 Best Companies to Work For" in America, while Fast Company has named Herman Miller among its 2010 "Innovation All-Stars." Herman Miller trades on the NASDAQ Global Select Market under the symbol MLHR.

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