Management's Discussion and Analysis

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

Executive Overview

We use problem-solving design and performance innovation to enhance the quality of human habitats worldwide, making our customers' lives more productive, rewarding, delightful, and meaningful. We do this by providing high quality products and related knowledge services. At present, most of our customers come to us for work environments in both corporate office and healthcare settings. We also have a growing presence in educational and residential markets, including home office. Our primary products include furniture systems, seating, storage and material handling solutions, freestanding furniture, and casegoods. Our services extend from workplace to furniture asset management. We extended our industry leading position in seating as we introduced the NeoCon award winning Embody TM chair and SetuTM family of seating.

We are globally positioned in terms of manufacturing operations. In the United States, our manufacturing operations are located in Michigan, Georgia, and Washington. In Europe, we have a significant manufacturing presence in the United Kingdom, our largest marketplace outside of the United States. In Asia, we have manufacturing operations in Ningbo, China.

Our products are sold internationally through wholly-owned subsidiaries or branches in various countries including Canada, France, Germany, Italy, Japan, Mexico, Australia, Singapore, China, India, and the Netherlands. Our products are offered elsewhere in the world primarily through independent dealerships. We have customers in over 100 countries.

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

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

Our business consists of various operating segments as defined by generally accepted accounting principles. These operating segments are determined on the basis of how we internally report and evaluate financial information used to make operating decisions and are organized by the various markets we serve. For external reporting purposes, we aggregate these operating segments as follows.

• North American Furniture Solutions-Includes the business associated with the design, manufacture, and sale of furniture products primarily though a Certified Dealer Network for office, learning and healthcare environments throughout the United States, Canada, and Mexico.

• Non-North American Furniture Solutions-Includes the business associated with the design, manufacture, and sale of furniture products primarily for work-related settings outside North America.

• Other-Includes our North American residential furniture business as well as other business activities such as Convia, and unallocated corporate expenses.

• Problem-Solving Design and Innovation-We are committed to developing research-based functionality and aesthetically innovative new products and have a history of doing so. We believe our skills and experience in matching problem-solving design with the workplace needs of our customers provide us with a competitive advantage in the marketplace. An important component of our business strategy is to actively pursue a program of new product research, design, and development. We accomplish this through the use of an internal research and design staff as well as third party design resources generally compensated on a royalty basis.

• Operational Excellence-We were among the first in our industry to embrace the concepts of lean manufacturing. HMPS provides the foundation for all of our manufacturing operations. We are committed to continuously improving both product quality and production and operational efficiency. We have begun to extend this lean process work externally to our manufacturing supply chain and to our distribution channel. We believe this work holds great promise for further gains in reliability, quality and efficiency.

• Building and Leading Networks-We value relationships in all areas of our business. We consider our networks of innovative designers, owned and independent dealers, and suppliers to be among our most important competitive factors and vital to the long-term success of our business.

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

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

• Owned Contract Furniture Dealers-At May 30, 2009, we owned 8 contract furniture dealerships, some of which have operations in multiple locations. The financial results of these owned dealers are included in our Consolidated Financial Statements. Product sales to these dealerships are eliminated as inter-company transactions from our consolidated financial results. We recognize revenue on these sales once products are shipped to the end customer and installation is substantially complete. We believe independent ownership of contract furniture dealers is generally, the best model for a financially strong distribution network. With this in mind, our strategy is to continue to pursue opportunities to transition our owned dealerships to independent owners. Where possible, our goal is to involve local managers in these ownership transitions.

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

• Independent Retailers-Certain products are sold to end customers through independent retail operations. Revenue is recognized on these sales once products are shipped and title passes to the independent retailer.

Future Avenues of Growth
We believe we are well positioned to successfully pursue our mission despite the risks and challenges we face. That is, we believe we can continue to improve the performance of human habitats worldwide. In pursuing our mission, we have identified the following as key avenues for our future growth.

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

• Adjacent Markets- Further applying our core skills in space environments such as healthcare, higher education, and residential.

• Developing Economies-Expanding our geographic reach in areas of the world with significant growth potential

• New Markets-Developing new products and technologies that serve new markets

Industry Analysis
The Business and Institutional Furniture Manufacturer's Association (BIFMA) is the trade association for the U.S. domestic office furniture industry. We monitor the trade statistics reported by BIFMA and consider them an indicator of industry-wide sales and order performance. BIFMA publishes statistical data for the contract segment and the office supply segment within the U.S. furniture market. The U.S. contract segment is primarily with large to mid-size corporations installed via a network of dealers. The office supply segment is primarily to smaller customers via wholesalers and retailers. We primarily participate, and are a leader in, the contract segment. It is important to note that our diversification strategy lessens our dependence on the U.S. office furniture market.

We also analyze BIFMA statistical information as a benchmark comparison against the performance of our domestic U.S. business and also to that of our competitors. The timing of large project-based business may affect comparisons to this data. Finally, BIFMA regularly provides its members with industry forecast information, which we use internally as one of many considerations in our short and long-range planning process.

Discussion of Business Conditions

Our fiscal years ended May 30, 2009 and May 31, 2008 each included 52 weeks of operations.

Fiscal 2009 was a year marked with unprecedented economic challenges and uncertainties. We are encouraged by our achievements in the face of these economic conditions. We were able to maintain solid operating income performance despite a rapid and steep decline in revenue, as we acted quickly to adjust our cost structure. While we took significant steps in reducing our cost structure, it did not prevent us from continuing to invest in our strategy of problem solving design and innovation. We introduced several new products designed to reach customers in nearly all areas of our business. These new products made a strong showing at NeoCon, the contract furniture industry's largest tradeshow. Our newly introduced chair, SetuTM, won "Gold" for conference room seating, and "Silver" in the lounge seating category. Our Embody TM chair won "Silver" in task seating and we were named "Manufacturer of the Year" by the Office Furniture Dealers Association for the second year in a row.

Additionally, after year-end we renegotiated our syndicated revolving line of credit, reducing our availability from $250 million to $150 million, while giving us additional covenant flexibility. We also completed the repurchase of $75 million of our outstanding public bonds. In addition to improving our covenant metrics this action also significantly reduces our interest expense moving forward.

In May we announced the closing of a manufacturing facility. This closing, which will take place over the next 9 to 12 months, will provide significant savings once completed. As a result of our HMPS process improvements, we do not believe this causes a reduction to our long-term manufacturing capacity.

While many of the decisions we made were difficult and had negative impacts on some of our employee-owners, they were made as a result of unprecedented economic conditions. Overall we are pleased with our performance for the year and the opportunities in front of us.

Looking forward, the general economic outlook for our industry in the U.S. is expected to be negative through calendar year 2009, and we remain appropriately cautious as a result. BIFMA issued its most recent report in May 2009 expecting that the growth rate of office furniture orders and shipments in the U.S. for calendar 2009 will be negative 29.3 percent and 28.6 percent, respectively. For calendar 2010, BIFMA expects positive 2.6 percent and 2.8 percent growth for orders and sales, respectively. This forecasted improvement is based upon an assumption of a slight improvement in the U.S. economy in the fourth quarter of calendar 2009 and the first quarter of 2010.

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)                                 % Chg from                          % Chg from
                                    Fiscal 2009          2008           Fiscal 2008          2007          Fiscal 2007
Net sales                           $    1,630.0          (19.0)%       $    2,012.1             4.9%      $    1,918.9
Cost of sales                            1,102.3          (16.1)%            1,313.4             3.2%           1,273.0
Gross margin                               527.7          (24.5)%              698.7             8.2%             645.9
Operating expenses                         404.9          (10.4)%              452.1             1.0%             447.8
Operating earnings                         122.8          (50.2)%              246.6            24.5%             198.1
Net other expenses                          23.9           47.5%                16.2            45.9%              11.1
Earnings before income
taxes                                       98.9          (57.1)%              230.4            23.2%             187.0
Income tax expense                          31.0          (60.4)%               78.2            35.1%              57.9
Minority interest, net of tax               (0.1 )           --                 (0.1 )           NA                  --
Net earnings                        $       68.0          (55.4)%       $      152.3            18.0%      $      129.1

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

                                                      Fiscal Year Ended
                                          May 30, 2009   May 31, 2008   June 2, 2007
Net sales                                       100.0 %        100.0 %        100.0 %
Cost of sales                                    67.6           65.3           66.3
Gross margin                                     32.4           34.7           33.7
Selling, general, and administrative
   expenses                                      20.3           19.7           20.6
Restructuring                                     1.7            0.3              -
Design and research expenses                      2.8            2.5            2.7
Total operating expenses                         24.8           22.5           23.3
Operating earnings                                7.5           12.3           10.3
Net other expenses                                1.5            0.8            0.6
Earnings before income taxes                      6.1           11.5            9.7
Income tax expense                                1.9            3.9            3.0
Net earnings                                      4.2            7.6            6.7


Net Sales, Orders, and Backlog
Fiscal 2009 Compared to Fiscal 2008

For the fiscal year ended May 31, 2009, consolidated net sales declined 19.0 percent to $1,630.0 million from $2,012.1 million in fiscal 2008. This year-over-year decline was driven by the global economic environment and was experienced across nearly all operating and geographic units. The strengthening of the U.S. dollar during fiscal 2009 against most major foreign currencies reduced our top line by approximately $30 million.

Our backlog of unfilled orders at the end of fiscal 2009 totaled $208 million, a 27 percent decline from $286 million at the end of fiscal 2008.

BIFMA reported an estimated year-over-year decline in U.S. office furniture shipments of approximately 13.8 percent for the twelve-month period ended May 2009. By comparison, the net sales decline for our domestic U.S. business was approximately 14.6 percent. We believe that while comparisons to BIFMA are important, we continue to pursue a strategy of revenue diversification that makes us less reliant on the drivers that impact BIFMA.

Fiscal 2008 Compared to Fiscal 2007

Consolidated net sales of $2,012.1 million in fiscal year 2008 increased $93.2 million from fiscal 2007. This increase of 4.9 percent was driven by growth within both of our reportable business segments.

Consolidated net trade orders in fiscal 2008 totaled $2,009 million representing a year-over-year growth of 2.1 percent from orders of $1,967 million in fiscal 2007.

The backlog of unfilled orders at the end of fiscal 2008 totaled $286 million, decreasing 0.7 percent from the fiscal 2007 level of $288 million.

In the second quarter of fiscal 2008, we announced a restructuring program designed to reduce operating expenses and improve profitability. These actions included the elimination of approximately 150 full-time positions within the North American Furniture Solutions segment. The positions that were eliminated represented a variety of functional areas, and the individuals affected were offered one-time termination benefits, including severance and outplacement services. Pre-tax restructuring expenses for fiscal 2008 of $5.1 million, are reflected separately in the Consolidated Statements of Operations. The related cash payments were $4.5 million in fiscal 2008. The balance of the restructuring accrual at May 31, 2008 was $0.6 million, and is reflected on the Consolidated Balance Sheet within "Other accrued liabilities."

Discussion of Business Segments - Fiscal 2009 Compared to Fiscal 2008

Net sales within our North American Furniture Solutions segment decreased from $1,636 million in fiscal 2008 to $1,349 million in the current year. This represents a year-over-year decrease of $287 million or 17.5 percent. We experienced a decline throughout our North American business operations, however, there were customer types within this segment that performed better than the overall average, primarily education, government and healthcare customers. Operating earnings for the segment in fiscal 2009 were $133 million, or 9.9 percent of net sales. This compares to segment earnings of $195.9 million or 12.0 percent in the prior year. With a top-line decline of 17.5 percent within the segment, we saw both dollar and percent-of-sales decreases to operating earnings in the North American Furniture Solutions segment. This segment's ability to generate strong operating performance despite a significant decline in volume is largely due to the variable business model in place, which allowed costs to be shed as the top line declined as well as our execution of the restructuring plan discussed above.

Net sales within the "Other" segment category were $42 million in fiscal 2009 compared to $52 million in the prior year. The decrease is the result of net sales declining within our North American Home business, primarily due to the challenges associated with the U.S. macroeconomic environment. This overall decrease was somewhat offset by sales to a new retail customer.

The U.S. dollar strengthened against most major currencies throughout fiscal 2009. The changes in currency exchange rates from the prior year affected the U.S. dollar value of net sales within both primary operating segments. We estimate these changes effectively decreased our fiscal 2009 net sales within the North American Furniture Solutions segment by approximately $18 million, driven largely by the U.S. dollar / Canadian dollar and the Mexican peso average exchange rate during the current year. Currency exchange rate fluctuations within our non-North American Furniture Solutions segment decreased net sales in fiscal 2009 by approximately $12 million. This was primarily driven by movements in the U.S. dollar / British pound sterling. It is important to note that period-to-period changes in currency exchange rates have a directionally similar impact on our international cost structures. Operating earnings within our non-North American segment increased an estimated $1.5 million in fiscal 2009 due to the aforementioned changes in currency exchange rates relative to the prior year level. The estimated impact on operating earnings of our North American business segment was a decrease of approximately $1 million.

Discussion of Business Segments - Fiscal 2008 Compared to Fiscal 2007

Net sales within our North American Furniture Solutions segment increased from $1,563.6 million in fiscal 2007 to $1,636.3 million in fiscal 2008. This represents a year-over-year increase of $72.7 million or 4.7 percent. We experienced growth throughout our North American business operations, but particularly strong growth was experienced in the healthcare industry which posted double-digit year-over-year growth. The healthcare industry remains a key growth area within the segment and lines up with our strategy to pursue diversification. Sales at our Mexican subsidiary again reached double-digit growth over fiscal 2007. Canadian sales turned around from a flat year in 2007 to impressive double-digit growth in fiscal 2008. Operating earnings for the segment in fiscal 2008 were $195.9 million, or 12.0 percent of net sales. This compares to segment earnings of $161.7 million or 10.3 percent in fiscal 2007. With top-line growth of 4.7 percent within the segment, we saw both dollar and percent-of-sales increases to operating earnings in the North American Furniture Solutions segment. This segment's strong operating performance is largely due to improved margins on certain recently introduced products, our focus on cost management, and our execution of the restructuring plan discussed above.

Net sales from our non-North American Furniture Solutions segment grew at double-digit rates. Every region within the segment posted increases in year-over-year net sales. Total net sales for the segment were $323.5 million, up $45.0 million or 16.2 percent. Sales generated from our non-North American Furniture Solutions segment increased to 16.1 percent of our consolidated net sales, an increase of 160 basis points from 14.5 percent in fiscal 2007. The largest sales contribution within this segment came from our operations in the United Kingdom, which posted a 17.5 percent year-over-year increase to the top line. We also saw a strong increase in net sales within continental Europe. Our results within the Asia Pacific region are particularly noteworthy, growing by 26.8 percent from fiscal 2007. We continued to pursue our diversification strategy and the effects are clearly visible in these results. Operating earnings within our non-North American segment totaled $47.3 million for the year or 14.6 percent of net sales. This compares to $28.9 million or 10.4 percent of net sales in fiscal 2007, an increase of 420 basis points.

The U.S. dollar continued to weaken against major currencies throughout fiscal 2008. The changes in currency exchange rates from fiscal 2007 affected the U.S. dollar value of net sales within both primary operating segments. We estimate . . .