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.  [__]

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 27, 2004, was $1,714,344,079 (based on $25.02 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 26, 2005:
Common stock, $.20 par value—69,582,315 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 26, 2005, 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, primarily within workplace environments, and provides related services that support companies all over the world. The company’s products are sold primarily to or through independent contract office furniture dealers. Through research, the company seeks to define and clarify customer needs and problems existing in its markets and to design, through innovation where appropriate and feasible, products, systems, and services as solutions to such problems. Ultimately, the company seeks to assist its customers in creating great places.

Herman Miller, Inc., was incorporated in Michigan in 1905. One of the company’s major plants and its corporate offices are located at 855 East Main Avenue, PO Box 302, Zeeland, Michigan, 49464-0302, and its telephone number is (616) 654-3000. Unless otherwise noted or indicated by the context, the term “company” includes Herman Miller, Inc., its predecessors, majority-owned subsidiaries, and effective May 29, 2004, consolidated variable interest entities. Further information relating to principles of consolidation is provided in theSignificant Accounting and Reporting Policies disclosure in Note 1 to the Consolidated Financial Statements included in Item 8 of this report.

Financial Information About Segments

Information relating to segments is provided in the Operating Segments disclosure in Note 22 to the Consolidated Financial Statements included in Item 8 of this report.

Narrative Description of Business

The company’s principal business consists of the research, design, 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®. 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™). In addition, during fiscal 2005 the company introduced Cella™ and Babble™, which are expected to be available for order in fiscal 2006. The Cella chair extends the company’s reputation for high performance, innovation, and sustainable design into the mid/low contract price category. Babble is a technological innovation designed to remix an individual’s voice sounds to keep conversations private. Babble is a product of the Herman Miller Creative Office division, which is aimed at creating technologies to serve current and new markets.

The company’s products are marketed worldwide by its own sales staff, its owned dealer network, independent dealers and retailers, and via the Internet. Salespersons work with dealers, the design and architectural community, as well as directly with end-users. Independent dealerships concentrate on the sale of Herman Miller products and some complementary product lines of other manufacturers. It is estimated that approximately 65 percent of the company’s sales in the fiscal year ended May 28, 2005 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 settings; and (4) residential and other environments.

Raw Materials

The company’s manufacturing materials are available from a significant number of sources within the United States, Canada, Europe, and Asia. To date, the company has not experienced any difficulties in obtaining its raw materials. The costs of certain direct materials used in our manufacturing and assembly operations are sensitive to shifts in commodity market prices. In particular, the costs of steel components, plastics, and particleboard are sensitive to the market prices of commodities such as raw steel, crude oil, lumber, and resins. Increases in the market prices for these commodities can have an adverse impact on our profitability. Further information regarding the impact of direct material costs on the company’s financial results is provided in Management’s Discussion and Analysis in Item 7 hereof.

Patents, Trademarks, Licenses, Etc.

The company has approximately 180 active United States utility patents on various components used in its products and approximately 93 active United States design patents. Many of the inventions covered by the United States patents also have been patented in a number of foreign countries. Various trademarks, including the name and style “Herman Miller” and the “Herman Miller Circled Symbolic M” trademark are registered in the United States and many foreign countries. The company does not believe that any material part of its business depends on the continued availability of any one or all of its patents or trademarks, or that its business would be materially adversely affected by the loss of any thereof, except for Herman Miller®, Herman Miller Circled Symbolic M®, Geiger®, Action Office®, Ethospace®, Aeron®, Mirra®, Eames®, and PostureFit®. It is estimated that the average remaining life of such patents and trademarks is approximately 6 years and 9 years, respectively.

Working Capital Practices

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

Customer Base

It is estimated that no single dealer accounted for more than 4 percent of the company’s net sales in the fiscal year ended May 28, 2005. It is also estimated that the largest single end-user customer accounted for approximately 8 percent of the company’s net sales with the 10 largest customers accounting for approximately 18 percent of net sales. The company does not believe that its business depends on any single or small number of customers, the loss of which would have a materially adverse effect upon the company.

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Backlog of Orders

As of May 28, 2005, the company’s backlog of unfilled orders was $228.6 million. At May 29, 2004, the company’s backlog totaled $209.5 million. It is expected that substantially all the orders forming the backlog at May 28, 2005, will be filled during the next fiscal year. Many orders received by the company are reflected in the backlog for only a short period while other orders specify delayed shipments and are carried in the backlog for up to one year. Accordingly, the amount of the backlog at any particular time does not necessarily indicate the level of net sales for a particular succeeding period.

Government Contracts

Other than standard provisions contained in contracts with the United States Government, the company does not believe that any significant portion of its business is subject to material renegotiation of profits or termination of contracts or subcontracts at the election of various government entities.

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 $32.7 million, $34.6 million, and $33.3 million on research and development activities in fiscal 2005, 2004, and 2003, 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 effect 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 attract and retain a competent and motivated workforce. The company’s human resources group provides employee recruitment, education and development, and compensation planning and counseling. There have been no work stoppages or labor disputes in the company’s history, and its relations with its employees are considered good. Approximately 6 percent of the company’s employees are 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 28, 2005, the company employed 6,035 full-time and 199 part-time employees, representing a 0.8 percent decrease in full-time employees and a 2.9 percent decrease in part-time employees compared with May 29, 2004. In addition to its employee work force, the company uses temporary purchased labor to meet uneven demand in its manufacturing operations.

Information About International Operations

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

The company’s products currently sold in international markets are manufactured by wholly owned subsidiaries in the United States and the United Kingdom. Sales are made through wholly owned subsidiaries or branches in Canada, France, Germany, Italy, Japan, Mexico, 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 22, Operating Segments, of the Notes to the Consolidated Financial Statements included in Item 8 of this report. Fluctuating exchange rates and factors beyond the control of the company, such as tariff and foreign economic policies, may affect future results of international operations.

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 atwww.hermanmiller.com, as soon as practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (SEC). The company’s filings with the SEC are also available for the public to read and copy in person at the SEC’s Public Reference Room at 450 Fifth Street NW, Washington, DC 20549, by phone at 1-800-SEC-0330, or via their internet website at www.sec.gov.

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Item 2 PROPERTIES

The company owns or leases facilities located throughout the United States and several foreign countries. The location, square footage, and use of the most significant facilities at May 28, 2005, were as follows.

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

⁽¹⁾     Part of this location includes a facility with approximately 36,200 square feet that has been exited and is included in “Assets Held for Sale” at May 28, 2005 in the Consolidated Balance Sheet.
⁽²⁾     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 28, 2005.
⁽³⁾     Part of this location includes a facility with approximately 20,800 square feet that has been exited and is currently being negotiated for assignment or sublet.

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Item 3 PENDING LEGAL PROCEEDINGS

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

The company has received a subpoena from the New York Attorney General’s office requesting certain information relating to the minimum advertised price program maintained by the Herman Miller for the Home division. The company is cooperating with the New York Attorney General’s office in this matter. At this time, as there has been no claim asserted in connection with this matter, the company has no reasonable basis on which to estimate the financial impact, if any, of this investigation.

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 28, 2005.

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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 seven years. Mr. Goeman joined Herman Miller’s New Product Development arena in 1980, and during his 26 years with the company he has held a variety of new product design and development leadership positions. Mr. Goodson was Senior Vice President of the company’s seating procurement groups from 1997 to 2001, President of Herman Miller’s Integrated Metal Technology, Miltech, and Powder Coat Technologies subsidiaries from 1990 to 1997, and Director of Operations at one of the company’s West Michigan facilities from 1987 to 1990. Mr. Lock was Senior Vice President for People Services from 2000 to 2003, Vice President for Integration from 1998 to 2000, and Vice President of International Human Resources from 1997 to 1998. Ms. Manos joined Herman Miller in 2002 and prior to this, she served as Vice President of Global Marketing and Global Product Marketing & Development at Haworth, Inc. for five years. Ms. Nickels joined Herman Miller in 2000 and prior to this was Chief Financial Officer of Universal Forest Products, Inc., for seven years. Mr. Nowicki was the Vice President of Finance for International Operations from 2000 to 2003; before this, he served in various financial functions within the company. Mr. Portlock was President of European Operations from 2000 to 2002, President of Northern European Operations from 1997 to 2000, U.K. Managing Director of Operations from 1993 to 1997, and U.K. Sales and Marketing Director from 1989 to 1993. Mr. Vranian was Vice President of Product Management and Marketing from 1998 to 2001, Vice President of Design, Development, and Marketing for Miller SQA from 1995 to 1998; prior to this, he served in various product development, marketing and finance roles within the company.

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

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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 26, 2005, there were approximately 16,500 shareholders of record of the company's common stock.

Dividends were declared and paid quarterly during fiscal 2005 and 2004 as approved by the Board of Directors. While it is anticipated that the company will continue to pay quarterly cash dividends, the amount and timing of such dividends is subject to the discretion of the Board depending on the company’s future results of operations, financial condition, capital requirements, and other relevant factors.

Issuer Purchases of Equity Securities

The following is a summary of share repurchase activity during the fourth quarter ended May 28, 2005.

⁽¹⁾ No shares were purchased outside of a publicly announced plan or program.

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

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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 2005, 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 1995-2000 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.
⁽⁸⁾ Calculated as interest-bearing debt plus shareholders’ equity.

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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 Overview

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

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

We manufacture our products using a system of lean manufacturing techniques collectively referred to as the Herman Miller Production System (HMPS). We strive to maintain efficiencies and cost savings by minimizing the amount of inventory on hand 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.

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

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We believe independent ownership of contract furniture dealers is, on balance, the best model for a financially strong distribution network. With this 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.

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Industry 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.

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Discussion of Business Conditions

Fiscal 2005 was a year marked by positive change for our business. It began with a smooth transition of leadership, as Brian Walker assumed the role of Chief Executive Officer. Throughout the year we continued to see signs of optimism in the economic outlook for our industry. Legislative developments during the period opened the chance at both a new market opportunity and enhanced financial flexibility. In addition, we were successful in our first year effort to comply with the demanding requirements of the Sarbanes-Oxley Act. Perhaps the most positive changes, however, were the significant financial improvements we made during the year, which were highlighted by double-digit sales growth and even higher percentage increases in profitability.

The macro-economic indicators of our industry showed general improvement during the year, giving us reason to be optimistic about the future. BIFMA issued a report in May 2005 providing historical quarterly data on a variety of economic measures including corporate profitability, service sector employment, and office vacancy rates, each of which showed an improving trend over the past year. The report included domestic industry forecast data through calendar year 2006 implying an expectation of continued sales and order growth. In particular, the report cited a strong outlook for business capital investment and employment as the primary drivers of the forecast.

We were also pleased to see favorable developments on the legislative front during the year. In December 2004, President Bush signed into law the Consolidated Appropriations Bill. This was exciting news within our industry because the bill contains a provision that effectively puts an end to the furniture sourcing monopoly long enjoyed by Federal Prison Industries, Inc., in supplying office furniture to certain federal government agencies. With the passage of this legislation, we, along with the others in our industry, will have an opportunity to compete fairly for these government contracts.

The American Jobs Creation Act, signed into law in October 2004, provides U.S. businesses with certain tax incentives aimed at encouraging investment and employment growth. The provisions of this legislation provide us with added financial flexibility, specifically in the area of utilizing cash reserves held at our foreign subsidiaries.

Throughout fiscal 2005 we were pleased to see an increase in customer interest and overall business activity. Client visits to our West Michigan headquarters increased more than 22% from the prior year. We also saw an increase in the number of project proposal opportunities during the year. Finally, showroom attendance at the June 2005 NeoCon trade show in Chicago was up from 2004.

While these are clearly encouraging signs for the direction of our business, the best evidence of improving conditions was our actual financial performance during the fiscal year. We experienced net sales growth from the prior year across virtually all areas of our business. In fact, our net sales for the year of $1,515.6 million were the highest since fiscal 2001, the year when the industry downturn began. New order activity during fiscal 2005 was also significantly improved from a year ago. As a result, our backlog at May 28, 2005, was at its highest level for a fiscal year end since May 2000.

The current year growth in sales and orders was complemented by a year-over-year improvement in profitability. Our gross margin percentage improved 1.2 points from the fiscal 2004 level. We also saw a year-over-year decline in our operating expenses, as a percent of net sales. While the restructuring actions we took between fiscal 2001 and 2004 were difficult, they played a critical role in delivering profitable growth in the current year.

Despite these favorable developments and improvements, we had our challenges during the year. Among the most significant of these were increasing prices for key manufacturing materials. Throughout the year, the cost of direct materials, especially steel components, negatively affected gross margins. Higher steel prices relative to those in the prior year added an estimated $18 million to $20 million to our fiscal 2005 direct material expenses. We also experienced cost increases for oil-based products such as plastics and resins as a result of the general upward trend in crude oil prices.

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In August 2004 we announced a general price increase, which varied by product line but averaged approximately 4% of list price. This change was made in response to the rapid increase in direct materials prices. In total, we estimate our fiscal 2005 net sales increased between $5.5 million and $6.5 million, net of increased domestic discounting, as a result of the August price change. In May 2005 we announced another general increase, again in response to the rise in direct material prices. This price change will be effective in September 2005 and averages approximately 3.8% of list. We believe these pricing decisions, in combination with our HMPS initiatives, will cover a large portion of the increased direct material costs in the near-term.

We continue to operate in a highly competitive pricing environment. A critical part of our business strategy in addressing competitive price pressure is to utilize innovative product design to differentiate us and provide more value to our customers. In doing so, we hope to demonstrate that price is but one of several important factors to consider in the buying decision. With this goal in mind, we continue to invest in new product development. Design and research expenses, including royalty payments to independent designers, totaled $40.2 million in fiscal 2005.

We introduced a redesign of our Abak™ system—a freestanding desk system—to the U.S. market at the NeoCon tradeshow in June 2004. Then, later in the year, we introduced the Cella™ chair and Babble™ technology. We are encouraged by the response to Abak, which we made available for order in late fiscal 2005. We believe Cella, the newest addition to our line of high-performance office seating, will set a new reference point for price and performance. Cella, which utilizes a new seating suspension technology, earned a “Best of NeoCon 2005” innovation award. Another “Best of NeoCon 2005” winner, Babble—which remixes voice sounds to keep conversations private—represents an innovation from Herman Miller Creative Office, our division aimed at creating technologies to serve current and new markets.

Restructuring Activities

Pre-tax restructuring charges totaling $1.0 million, $10.3 million, and $16.4 million were recognized during fiscal years 2005, 2004, and 2003, respectively. The following is a breakdown by category of these charges.

(In Millions)

The majority of our fiscal 2005 restructuring expenses related to the previously announced and completed relocation of our Canton, Georgia, operation. The charges resulted principally from pension-related settlements, which are recognized as terminated employees withdraw their assets from the retirement plan, and building carrying costs on the Canton facility.

Charges in fiscal year 2004 also related primarily to the Canton relocation. In addition, during that time we recorded expenses related to the consolidation of our Holland, Michigan, Formcoat operation into existing space in nearby Zeeland, Michigan. These charges were partially offset by a gain on the sale of our Holland Chair Plan facility as well as adjustments to the expected sub-lease timing for facilities previously exited under our restructuring plan.

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Fixed asset impairment charges resulting from the Canton and Formcoat actions comprised the majority of our fiscal 2003 restructuring expenses. The remaining expense in that period related mainly to additional workforce reductions. These remaining charges were offset, in part, by a gain from the sale of our Rocklin, California, facility.

Our Canton facility remains listed for sale. We have an interested buyer, but have not yet reached a point where the buyer’s commitment has become binding. Therefore, the carrying values of the Canton assets, which were previously reduced to their estimated fair market values totaling $7.5 million, remain classified as long-term assets under the balance sheet caption “Net Property and Equipment” at May 28, 2005.

We may recognize additional restructuring charges in the future as we incur the remaining costs associated with previously announced actions. We expect that such charges would relate primarily to employee pension benefits. The remaining pension-related restructuring expenses yet to be recognized total approximately $0.9 million. However, it is difficult to estimate when these expenses will be recorded since the timing depends on when the related plan assets are withdrawn.

Cash outflows related to our restructuring activities totaled approximately $1.9 million in fiscal 2005. This compares to outflows of $12.8 million and $14.4 million in fiscal years 2004 and 2003, respectively. We expect future cash outflows will relate mainly to carrying costs and lease obligations on previously exited facilities and will total between $1.5 million to $2 million. This amount, the majority of which will likely be incurred during fiscal 2006, does not include cash proceeds from the potential future sale of our Canton facility.

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)

⁽¹⁾     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.

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Consolidated Net Sales, Orders, and Backlog
We had double-digit year-over-year growth in net sales for each quarterly period in fiscal 2005. For the full year, we averaged approximately $29.1 million per week in net sales compared to $25.7 million in 2004. As business conditions steadily improved through the year, we saw our rate of sales trend upward. This resulted in an increase in net sales of approximately 8.9% between the first and second half of the fiscal year.

Net trade orders totaled $1,534.7 million in fiscal 2005. This compares to $1,353.4 million and $1,317.9 million in fiscal 2004 and 2003, respectively. On a weekly average basis, new orders for the full year totaled $29.5 million, an amount which slightly outpaced net sales. Unlike net sales, however, we did not see an increase in our rate of new orders between the first and second half of the year. In fact, our average weekly order rate declined slightly between these periods. This reflects what we have traditionally experienced as a seasonal decline in orders due to the holiday period as well as the acceleration of order activity in the first half due to the timing of the federal government fiscal year end. The ending consolidated backlog at May 28, 2005 totaled $228.6 million. This represents an increase of 9.1% from $209.5 million at the end of fiscal 2004.

The consolidation of variable interest entities (VIE’s) in connection with Financial Accounting Standards Board Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46(R)) increased our fiscal 2005 net sales and orders by approximately $13.2 million and $16.6 million, respectively. Our fiscal 2005 ending consolidated backlog included amounts related to our remaining VIE totaling approximately $8.9 million. This compares to VIE-related backlog of approximately $5 million at the end of last year. Refer to theCumulative Effect of Accounting Change section of this report for further information on our adoption of FIN 46(R) at the end of fiscal 2004.

Domestic Operations
Our fiscal 2005 domestic net sales totaled $1,242.7 million. This represents an increase of 10.6% from sales of $1,123.8 million in fiscal 2004. New orders in the current year totaled $1,260.3 million compared to $1,135.4 million in 2004 – an increase of 11.0%. Sales and order increases were experienced to varying degrees across the majority of our domestic operations. Domestic net sales and orders in fiscal 2003 totaled $1,134.0 million and $1,117.0 million, respectively.

The markets in which we do business remain highly competitive. As we expected, price discounting continued to place negative pressure on our sales and profitability during fiscal 2005. While we were successful in capturing a portion of the price increase implemented in August 2004, higher domestic price discounting offset some of its positive effect. We expect this pricing pressure to continue. Accordingly, we anticipate that increased discounting in fiscal 2006 will partially offset our planned September price increase.

While it is difficult to measure shifts in market share without looking at sales and order data over a period of several quarters, we believe our performance relative to that of the domestic industry (as reported by BIFMA) provides evidence that our market share is moving in a positive direction. Our domestic net sales growth in fiscal 2005 exceeded the BIFMA-reported data by approximately 1.2 percentage points. For the same period, our growth in domestic new orders was approximately 3.8 percentage points higher than the industry.

During the first quarter of fiscal 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 2003. At that time, we began recognizing as “Minority Interest” the percentage of income or loss that is attributed to the 10% minority owner of the dealership. 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 2005 and 2004 net sales by approximately $16.5 million and $12.3 million, respectively.

International Operations and Exports from the United States
Net sales at our international operations totaled $272.9 million, making it a financial highlight for the second consecutive year. This performance represents an increase of 27.2% from sales of $214.5 million in 2004. In fiscal 2003, international net sales totaled $202.5 million. We experienced significant sales increases during the current fiscal year in the majority of our international markets with the exception of Japan, a region that showed growth for us last year. Sales growth in the current year was particularly strong in the United Kingdom, Canada, Mexico, Australia, and Singapore. In total, sales from our international operations represented approximately 18.0% of our consolidated net sales in fiscal 2005. This compares to 16.0% in fiscal 2004 and 15.2% in fiscal 2003.

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The weakening of the U.S. dollar, particularly against the British Pound, had an inflationary effect on our international net sales. We estimate the year-over-year change in exchange rates effectively increased the U.S. dollar value of our fiscal 2005 net sales by approximately $11 million. It is important to note that these changes in exchange rates generally have a similar inflationary effect on our international cost structure. In other words, the U.S. dollar value of our international expenses increased relative to prior year levels as a result of the weakening U.S. dollar during fiscal 2005.

We experienced a significant improvement in profitability at our international operations during fiscal 2005. The year ended May 28, 2005 marked our third consecutive year of profitable international results. Net earnings for 2005 totaled approximately $9.8 million compared with $3.2 million last year and $3.0 million in fiscal 2003.

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

⁽²⁾ The cumulative effect of accounting change for fiscal 2004 was not measurable.

Gross Margin
The combination of increased sales and improved manufacturing efficiency helped bring our fiscal 2005 consolidated gross margin to its highest annual level in four years. The significant increase in net sales, bolstered in part by the August 2004 price increase, drove much of the improvement in the current year as we were better able to leverage fixed manufacturing costs. We also benefited from a full year of the operating efficiencies gained from our restructuring plan. This resulted in a notable reduction in direct labor and manufacturing overhead expenses as measured on a percent of sales basis. These improvements were achieved in the current year despite higher direct material costs, higher incentive compensation expenses attributable to improved profitability, and increased competitive pricing pressure compared to the prior year.

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

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

Our financial performance in the area of manufacturing overhead also improved from the prior year. Higher current year sales volume allowed us to better leverage our fixed manufacturing costs. Also, unlike last year, during fiscal 2005 we experienced a full year of cost savings from the Canton consolidation. These factors combined to significantly lower our overhead percent of sales in the period, despite higher year-over-year incentive compensation and employee benefit expenses. Pretax variable compensation expense included in our fiscal 2005 cost of sales totaled $15.1 million compared to $6.1 million in 2004 and $1.0 million in 2003.

The decline in gross margin between fiscal years 2003 and 2004 was attributable to several factors including higher fiscal 2004 price discounting, increasing material costs, labor inefficiencies during the relocation of the Canton operation, and an increase in incentive bonus expense between years.

Operating Expenses and Operating Earnings
On April 6, 2005, we reported that we had reached a settlement with the General Services Administration (GSA) concerning a prior audit of the 1988 to 1991 multiple award schedule contract. In light of the settlement, which required us to pay the GSA $0.5 million, we performed a complete re-evaluation of our balance sheet reserves related to all GSA contract periods. As a result of this work, we made the determination that these reserves should be reduced. Accordingly, during the fourth quarter of fiscal 2005, we recorded an adjustment to the reserves, which reduced our pre-tax operating expenses by approximately $13.0 million.

Exclusive of this adjustment, SG&A expenses in fiscal 2005 increased by approximately $35.6 million or 11.7% from the prior year level. A significant portion of this increase related to higher current year spending on marketing activities related to new product launches as well as in categories that vary with sales volume such as sales incentive compensation and royalties.

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

We also had higher incentive compensation expenses in the current year. These costs vary based upon our financial performance. Pretax variable compensation expense included in our current year operating expenses totaled $18.5 million. This compares to $9.4 million last year and $3.7 million in fiscal 2003.

Design and research costs included in total operating expenses were $40.2 million, $40.0 million, and $39.1 million for 2005, 2004, and 2003, respectively. These expenses include royalty payments paid to designers of our products as the products are sold. We consider such royalty payments, which totaled $7.5 million, $5.4 million, and $5.8 million, in fiscal years 2005, 2004, and 2003, respectively, to be variable costs of the products being sold. Accordingly, we do not include them in research and development costs as discussed in Note 1 of the consolidated financial statements.

We estimate that year-over-year changes in foreign currency exchange rates added approximately $2.9 million to our fiscal 2005 operating expenses relative to the prior year. The comparable increase in our fiscal 2004 expenses totaled approximately $2.4 million.

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The significant reduction in total operating expenses between fiscal 2003 and 2004 was partially due to a $5.2 million pre-tax credit to SG&A expenses resulting from the reversal of a previously established legal accrual. This adjustment was recorded early in fiscal year 2004 as a result of a favorable court ruling related to a previous lawsuit. The remaining expense reduction between 2003 and 2004 was driven primarily by lower relative compensation, benefit, depreciation, and restructuring expenses.

During the third quarter of fiscal 2005, the SEC issued a letter aimed at clarifying certain issues regarding the accounting for operating leases. The issues discussed in the letter include the appropriate accounting treatment of leasehold improvement amortization, “rent holiday” periods, and landlord-paid incentives for leasehold improvements. This clarifying guidance did result in a change in the way we account for these issues, particularly with respect to “rent holiday” periods and landlord-paid incentives. However, the impact of this change on our consolidated financial statements was not material.

Our fiscal 2005 operating earnings of $121.9 million represented a $60.7 million improvement over the prior year. On a percent-of-sales basis, this was our highest level of operating earnings since fiscal year 2001. Operating earnings attributable to the consolidation of VIEs under FIN 46(R) totaled approximately $0.2 million in fiscal 2005. Fiscal 2004 operating earnings were not affected by the consolidation of VIEs due to our timing of adoption of this accounting standard.

Other Expenses and Income
Net other expenses totaled $9.1 million in fiscal 2005 compared to $9.6 million in 2004 and $12.5 million in 2003. Current year interest expense was slightly lower than the prior year due to lower overall debt levels. Additionally, fiscal 2005 interest income was higher than the prior year due to the impact of comparatively higher interest rates on our cash and investment balances.

The year-over-year decline between 2003 and 2004 was caused primarily by an accounting charge related to our investment in Spectrum, a contract furniture dealership in Philadelphia, as discussed below. Lower fiscal 2004 interest charges also contributed to the decline. Changes in foreign exchange rates and the resulting transaction gains between years partially offset the decline.

We recorded a net foreign currency transaction gain in fiscal 2005 of approximately $0.2 million. This compares to net gains of approximately $0.1 million in the prior year and $0.9 million in fiscal 2003.

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 fiscal 2004.

Income Taxes
Our effective tax rate in fiscal 2005 was 39.6%. This compares to 17.1% last year and 34.9% in fiscal 2003. The rate in the current year was higher than the 34% to 35% range we had previously expected. The most significant driver of this increase was a tax charge, recorded in the fourth quarter, related to our planned cash repatriation under the American Jobs Creation Act (AJCA). Last year, President Bush signed into law the AJCA, which created a temporary incentive for U.S. corporations to repatriate undistributed income earned abroad by providing an 85% dividend received deduction. During the fourth quarter of fiscal 2005 we finalized our plan to repatriate a portion of our international cash reserves under this new legislation. In previous periods, we considered this income permanently invested outside of the U.S., and accordingly, we were not required to provide for U.S. taxes on these funds. As a result of this plan, we recorded tax expense of approximately $4.4 million in anticipation of repatriating approximately $45 million. Also in the fourth quarter, we recorded tax true-ups, caused by recent changes in certain tax laws, as well as other federal, state, and international deferred tax adjustments.

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Our effective tax rate for fiscal 2004 included a $6.9 million benefit from the release of tax reserves as a result of the closure of IRS audits for the years 1999, 2000, and 2001. We expect our effective tax rate in the future to range between 35% and 36%.

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

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

During the first quarter of fiscal 2005, a qualifying triggering event occurred with one of the VIEs which resulted in reconsideration under FIN 46(R). Based on this reconsideration, we determined that we were no longer considered the primary beneficiary. As such, we recorded the ownership transition and ceased consolidation of the dealership in the first quarter of fiscal 2005. This resulted in a pre-tax gain of $0.5 million, which we recorded as “Other Expenses (Income)” in the Consolidated Statement of Operations. In connection with this ownership transition we incurred a $1.5 million cash outflow in the first quarter of fiscal 2005 related to the extinguishment of the outstanding bank debt of the VIE.

The consolidation of the remaining VIE increased both total assets and liabilities as of May 28, 2005, by approximately $1.3 million. At May 29, 2004, consolidation of the two VIEs increased our assets by approximately $2.0 million and liabilities by $2.6 million. Refer to Note 4 of the consolidated financial statements for additional information on FIN 46(R).

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 2004 and prior, 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 $68.0 million in fiscal 2005 or $0.96 per diluted share. This includes income of approximately $0.12 per share, net of taxes, from the adjustment to GSA reserves as previously discussed. In addition, net earnings per diluted share was reduced by approximately $0.06 from taxes related to the anticipated repatriation under the AJCA. In fiscal 2004, we generated net earnings of $42.3 million or $0.58 per share after the impact of the cumulative effect of accounting change. This includes earnings of approximately $0.09 per diluted share from the $6.9 million favorable adjustment to tax reserves as previously discussed. Net earnings in fiscal 2003 totaled $23.3 million or $0.31 per share. The per-share impact of restructuring charges recognized during fiscal years 2005, 2004, and 2003 totaled approximately $0.01, $0.09, and $0.14, net of taxes, respectively.

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

(In Millions)

⁽³⁾Amounts shown are net of outstanding letters of credit, which are applied against the company’s unsecured credit facility, excluding the $50 million accordion feature disclosed in Note 10.
⁽⁴⁾ During fiscal 2005, the company entered into a new revolving credit facility.

Cash Flow –Operating Activities
Cash flows generated from operating activities in fiscal 2005 increased 32.2% over the same period last year. This was principally driven by the year-over-year improvement in net earnings, favorable changes in working capital balances, and lower current-year cash outflows related to previous restructuring actions.

Changes in working capital balances during fiscal 2005 increased cash flows from operations by $21.4 million. Increases in accounts payable and accrued liabilities for employee compensation and benefits and income taxes drove much of the working capital benefit during the year. Partially offsetting these favorable balance changes were volume-related increases in inventory and accounts receivable.

Our inventory and accounts receivable balances increased from the beginning of the current year due to the general growth in the business. As expected, inventories did decline from the end of our second quarter due in large part to the seasonal timing of federal government project completions. Collections of accounts receivable remained strong throughout the year and we believe our recorded accounts receivable valuation allowances as of May 28, 2005, are adequate to cover the risk of potential bad debts. Our average days sales outstanding (DSO) in net inventory and accounts receivable for the last quarter of the year improved to 49.8 at the end of the year from 50.1 a year ago and 47.8 in fiscal 2003.

Allowances for non-collectible accounts receivable, as a percent of gross accounts receivable, totaled 3.2%, 5.4%, and 9.3% as of the end of fiscal 2005, 2004, and 2003, respectively. The reduction in the current year percentage was driven by an overall improvement in the quality of our accounts receivable aging.

During fiscal year 2004, changes in working capital balances resulted in a net use of cash totaling $19.4 million. In that period, we experienced a decrease in accrued income taxes and increases in both accounts receivable and inventories. These negative factors were partially offset by a production-driven increase in accounts payable, increased compensation and benefit accruals, and favorable changes in deferred taxes. By contrast, in fiscal 2003 we received a significant working capital cash flow benefit, mainly driven by a net increase in accrued income taxes and declines in accounts receivable and inventory balances.

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Restructuring-related cash payments and contributions to our employee pension plans made during the past three fiscal years had the effect of reducing cash flows from operating activities in each period.

Cash Flow –Investing Activities
Capital expenditures accounted for the majority of the investing outflows during fiscal years 2005 and 2004. Also included in net cash flows used in investing activities were payments for acquisitions, which totaled $0.7 million in the current year related to Office Interiors, Inc., and $0.2 million in the prior year related to Spectrum. These acquisitions are discussed further in Note 2 of the consolidated financial statements.

Our fiscal 2004 cash outflows from investing activities are net of proceeds received from the sale of the Holland, Michigan, Chair Plant facility in connection with our restructuring plan. These proceeds totaled $6.0 million and were received in the second quarter of fiscal 2004.

In fiscal 2003, net cash outflows were comprised primarily of capital expenditures offset by proceeds of approximately $20.2 million related to the sale of two properties exited in connection with our restructuring plan.

As of the end of fiscal year 2005, we had outstanding commitments for future capital purchases of approximately $10.6 million. We expect full-year capital expenditures in 2006 to total between $50 million and $55 million. A large portion of the planned increase over the current year is due to the scheduled construction of a new office facility and showroom in the United Kingdom as well as new product launches.

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

Share repurchases proved to be the most significant factor affecting the comparison of financing outflows between fiscal 2005 and 2004. This increase in share repurchase activity was the result of a capital structure plan approved by our Board of Directors during the third quarter of last year, which provided for an additional share repurchase authorization of $100 million. We received yet another share repurchase authorization of $100 million from our Board of Directors during fiscal 2005. As of May 28, 2005, we had approximately $58 million remaining for future repurchases.

The increase in dividend payments between fiscal years 2004 and 2005 was the result of a 100% increase in our quarterly dividend rate to $0.0725 per share, as announced in April 2004. Partially offsetting the cash flow effects of share repurchases and dividend payments was cash received related to stock-based benefit plans. In the current year, we received approximately $59.9 million, net of $4.8 million tax, from the issuance of shares in connections with these plans. By comparison, we received approximately $27.4 million, net of $2.5 million tax, from the issuance of shares in fiscal 2004. In fiscal year 2003, these amounts totaled $3.9 million, net of $0.2 million tax. We attribute the current year increase in share issuance activity mainly to the 23.8% increase in the market price of our common stock, which moved from $24.08 per share at the end of last year to $29.80 per share at the end of fiscal 2005.

During the first quarter of fiscal 2005, we paid off a $1.5 million note balance associated with a VIE consolidated under FIN 46(R). We also made a scheduled $13 million payment during the year on our private placement notes. We expect to make another $13 million payment on these private placement notes during the fourth quarter of fiscal 2006. Debt repayments made during fiscal 2004 and 2003 totaled $14.8 million and $13.4 million, respectively.

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Interest-bearing debt at the end of fiscal 2005 declined $13.2 million from a balance of $207.2 million at the end of last year. While the majority of this decline was due to the debt payments described above, a portion of it also related to a decrease in the fair value of our interest rate swap arrangements during the period. The combined fair values of the interest rate swap arrangements, as described in Note 19, was negligible as of the end of May 28, 2005. This compares to a negative $1.3 million at the end of fiscal 2004. The fair values of these swap arrangements change based on fluctuations in market interest rates. Such changes are not included in net earnings for the period. Instead, they are reflected as adjustments to our consolidated assets and/or liabilities.

At the end of fiscal 2005, the portion of our total interest-bearing debt that was effectively converted to a variable-rate basis through our swap arrangements totaled $69 million. Interest expense savings resulting from these arrangements totaled approximately $1.1 million in fiscal 2005, $1.6 million in fiscal 2004, and $0.9 million in fiscal 2003.

During fiscal 2005 we entered into a new $150 million unsecured five-year revolving credit agreement.  The agreement has an accordion feature that may enable the credit facility to be increased by an additional $50 million.  The new arrangement replaced our previous $200 million bank facility scheduled to expire in April 2005.  Outstanding borrowings under the new agreement incur interest at rates based on the prime, certificates of deposit, LIBOR, or negotiated rates.

The only usage against our unsecured credit facilities at the end of fiscal 2005 and 2004 represented outstanding standby letters of credit totaling $12.8 million and $13.8 million, respectively. The provisions of our private placement notes and unsecured credit facility require that we adhere to certain covenant restrictions and maintain certain performance ratios. We were in compliance with all such restrictions and performance ratios during the current year and expect to remain so in the future.

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

Contingencies

We have received a subpoena from the New York Attorney General’s office requesting certain information relating to the minimum advertised price program maintained by our Herman Miller for the Home division. We are cooperating with the New York Attorney General’s office in this matter. At this time, as there has been no claim asserted in connection with this matter, we have no reasonable basis on which to estimate the financial impact, if any, of this investigation.

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

For a number of years, we have 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 our compliance with the GSA contracts. We have occasionally noted errors in complying with contract provisions. From time to time we have notified the GSA of known instances of non-compliance (whether favorable or unfavorable to the GSA) once such circumstances are identified and investigated. We do not believe that any of the errors brought to the GSA’s attention will adversely affect our relationship with the GSA. Currently there are no GSA audits either scheduled or in process. Refer to Note 21 for discussion of a settlement reached with the GSA in the fourth quarter of fiscal 2005, which relates to previous audits of the 1988 to 1991 contract years. We do not expect resolution of potential future audits to have a material adverse effect on our consolidated financial statements.

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

Basis of Presentation

Fiscal years 2005, 2004, and 2003 each contained 52 weeks. This is the basis upon which all of the above weekly average data is presented. Our 2006 fiscal year, which began May 29, 2005, will have 53 weeks. This is required approximately every six years in order to re-align our fiscal calendar-end dates with the actual calendar months.

Contractual Obligations

Contractual obligations associated with our ongoing business and financing activities will result in cash payments in future periods. The following table summarizes the amounts and estimated timing of these future cash payments. Further information regarding debt obligations can be found in Note 11 of the consolidated financial statements. Likewise, further information related to operating leases can be found in Note 12.

⁽⁵⁾Amounts indicated do not include the recorded fair value of interest rate swap instruments.
⁽⁶⁾ Estimated future interest payments on our outstanding debt obligations are based on interest rates as of May 28, 2005. Actual cash outflows may differ significantly due to changes in underlying interest rates and timing of principal payments.
⁽⁷⁾Purchase obligations consist of non-cancelable purchase orders and commitments for goods, services, and capital assets.
⁽⁸⁾ 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 28, 2005, the total accumulated benefit obligation for our domestic and international employee pension benefit plans was $308.6 million.
⁽⁹⁾Represents the recorded dividend payable as of May 28, 2005. Future dividend payments are not considered contractual obligations until declared.
⁽¹⁰⁾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.
⁽¹¹⁾Total balance is reflected as a liability in the Consolidated Balance Sheet at May 28, 2005.

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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 21 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 28, 2005, we were considered the primary beneficiary of one such relationship due to the nature of our variable interest in this entity as further discussed in Note 4 of the consolidated financial statements.

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. As of May 28, 2005, our maximum exposure to potential losses related to financing provided to these other entities totaled $1.4 million. Information on our exposure related to outstanding loan guarantees provided to such entities is included in Note 21 of the consolidated financial statements.

Critical Accounting Policies and Estimates

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

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

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

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

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The accounts receivable allowance totaled $5.6 million and $8.1 million at May 28, 2005 and May 29, 2004, respectively. This year-over-year reduction is attributable to the overall improvement in the quality of our accounts receivable aging.

Goodwill
The net carrying value of our goodwill assets at May 28, 2005, totaled $39.1 million. We account for our goodwill assets in accordance with Statement of Financial Accounting Standards No. 142. Under this accounting guidance, we are required to perform an annual test on our goodwill assets, by reporting unit, to determine whether the asset values are impaired. If impairment is determined, we are required to recognize a charge sufficient to reduce the net carrying value of the assets to their estimated fair market value.

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

The results of this test, performed in the fourth quarter of fiscal 2005, indicated that our net goodwill asset values were not impaired. Our testing employed 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 a full percentage point before the results of the test indicated a potential impairment issue.

Warranty Reserve
We stand behind our products and keep our promises to customers. From time to time, quality issues arise resulting in the need to incur costs to correct 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 at the majority of our manufacturing operations are valued using the last-in, first-out (LIFO) method, whereas inventories of certain other subsidiaries are valued using 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. We also have foreign tax credits available in certain jurisdictions to reduce future tax due. Future tax benefits for NOL carryforwards and foreign tax credits are recognized to the extent that realization of these benefits is considered more likely than not. We base this determination on the expectation that related operations will be sufficiently profitable or various tax planning strategies available to us will enable us to utilize the NOL carryforwards and/or foreign tax credits. When information becomes available that raises doubts about the realization of a deferred income tax asset, a valuation allowance is established.

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Self-Insurance Reserves
With the assistance of independent actuaries, we establish reserves for workers’ compensation and general liability exposures. The reserves are established based on actuarially determined expected future claims. We also establish reserves for health benefit exposures based on historical claims information along with certain assumptions about future trends. The methods and assumptions used to determine the liabilities are applied consistently, although actual claims experience can vary. We also maintain 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. Among the most significant of these assumptions are the discount rate, interest-crediting rate, and expected long-term rate of return on plan assets. We determine these assumptions as follows:

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

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

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

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New Accounting Standards

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 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 106-2 is effective for the first interim or annual period beginning after June 15, 2004. We adopted FSP 106-2 at the beginning of the second quarter of fiscal 2005. Refer to Note 13 for further discussion.

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

In December 2004, the FASB issued a revision of SFAS No. 123, “Share-Based Payment” (SFAS 123(R)), which supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. This statement focuses primarily on transactions in which an entity obtains employee services in exchange for share-based payments. Under SFAS 123(R), a public entity generally is required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award, with such cost recognized over the applicable vesting period. This new accounting treatment is also required for any share-based payments to the company’s Board of Directors. As defined within the transition provisions of SFAS 123(R), public entities are required to adopt this new method of accounting using the modified prospective method and may elect to restate prior periods using the modified retrospective method. SFAS 123(R) also requires an entity to provide certain disclosures in order to assist in understanding the nature of share-based payment transactions and the effects of those transactions on the financial statements. On April 14, 2005, the SEC announced that it would provide for phased-in implementation of SFAS 123(R). Under this provision registrants are required adopt SFAS 123(R) no later than the beginning of the fiscal year beginning after June 15, 2005. As such, we are required to adopt the provisions of SFAS 123(R) at the beginning of fiscal 2007. Refer to Note 1 for disclosure of the pro-forma earnings effects of our stock-based awards. We are currently evaluating the impact the implementation guidance and revisions included in SFAS 123(R) will have on our consolidated financial statements.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an Amendment of APB Opinion No. 29” (SFAS 153). This Statement amends APB 29, eliminating the exception to the fair-value principle for exchanges of “similar productive assets,” which had been accounted for based on the book value of the assets surrendered with no gain recognition. The general requirement under APB 29 that nonmonetary exchanges of assets be accounted for at fair value with gain or loss recognition was left intact, as long as the exchange has commercial substance and the fair value is determinable. The provisions of SFAS 153 should be applied prospectively, effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. As such, we are required to adopt these provisions at the beginning of the second quarter of fiscal 2006. We do not expect the adoption of SFAS 153 to have a material impact on our consolidated financial statements.

In December 2004, the FASB issued Staff Position No. 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004” (FSP 109-1) and 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (FSP 109-2). This guidance was issued in response to the American Jobs Creation Act of 2004 that was signed into law by the President in October 2004. These new standards were effective upon issuance, during the third quarter of fiscal 2005. Refer to Note 17 for further discussion of the impact on our consolidated financial statements.

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In February 2005, the SEC Office of the Chief Accountant issued a letter to clarify the staff’s interpretation regarding the accounting for operating leases under generally accepted accounting principles. Issues covered in this clarification include the amortization of leasehold improvements, rent holidays, and landlord/tenant incentives. The SEC staff believes that its positions are based upon existing accounting literature, and as such, any registrants who determine their accounting for leases in prior periods to be in error should issue a restatement of results from the correction of any such errors, if deemed significant. We have reevaluated our accounting for leases and determined that the impact of this clarification on our consolidated financial statements was not material in fiscal 2005 or in prior periods. Refer to Note 12 for further information regarding our operating leases.

In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations, an Interpretation of FASB Statement No. 143” (FIN 47). Under FIN 47, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. Any uncertainty about the amount and/or timing of future settlement should be factored into the measurement of the liability when sufficient information exists. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value. The provisions of FIN 47 are required to be applied no later than the end of fiscal years ending after December 15, 2005, although early adoption is encouraged. As such, we are required to adopt FIN 47 by the end of fiscal 2006 and are currently evaluating its impact on our consolidated financial statements.

Forward Looking Statements

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

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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.

Direct Material Costs
The company is exposed to risks arising from price changes for certain direct materials used in its manufacturing processes. The largest direct material costs incurred by the company are for steel, plastic/textiles, and wood particleboard components. During fiscal year 2005, the market price of steel rose significantly. As a result, the company estimates its direct material costs for steel in that period increased between $18 million and $20 million over the previous year. The market price of plastic components is sensitive to the cost of oil and natural gas. Oil and natural gas prices increased sharply during the latter half of fiscal year 2005 and the company expects this will likely have a negative effect on the price of plastics and textiles in the near term. In addition to the market dynamics of supply and demand, the cost of wood particleboard is sensitive to the impact of oil prices on resins and physical transportation.

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

Favorable foreign currency fluctuations during fiscal 2005 resulted in increased earnings from continuing operations before income taxes of $0.2 million. Additionally, the accumulated other comprehensive loss component of total shareholders’ equity was reduced during fiscal 2005 by $3.9 million as a result of these changes. By comparison, currency fluctuations in fiscal 2004 resulted in increased pretax earnings of $0.1 million and reduced accumulated other comprehensive loss by $3.4 million.

Interest Rate Risk
The company maintains fixed-rate debt. For fixed-rate debt, changes in interest rates generally affect fair market value but not earnings or cash flows. The company does not have an incentive to prepay fixed rate debt prior to maturity, and as a result, interest rate risk and changes in fair market value should not have a significant impact on such debt until the company would be required to refinance it. The company has three separate interest rate swap agreements that effectively convert $69 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, if significant, could have a material impact on the company’s financial results. The interest rate swap derivative instruments are held and used by the company as a tool for managing interest rate risk. They are not used for trading or speculative purposes. The counterparties to these swap instruments are large financial institutions that the company believes are of high-quality creditworthiness. While the company may be exposed to potential losses due to the credit risk of non-performance by these counterparties, such losses are not anticipated.

The swap arrangements resulted in a reduction of net interest expense of approximately $1.1 million, $1.6 million and $0.9 million in fiscal years 2005, 2004, and 2003, respectively. As of May 28, 2005, the combined fair market values of the swap instruments was less than $0.1 million. All cash flows related to the company’s interest rate swap agreements are denominated in U.S. dollars. For further information, refer to Notes 18 and 19 to the consolidated financial statements.

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As of May 28, 2005, the weighted-average interest rate on the company’s variable-rate debt was approximately 6.4%. Based on the level of variable-rate debt outstanding as of that date, a 1 percentage-point increase in the weighted-average interest rate would increase the company’s annual pre-tax interest expense by approximately $0.7 million.

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 less than $0.1 million at the end of fiscal 2005.

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Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Quarterly Financial Data

Set forth below is a summary of the quarterly operating results on a consolidated basis for the years ended May 28, 2005, May 29, 2004, and May 31, 2003. Refer to Management’s Discussion and Analysis provided in Item 7 and the Notes to the Consolidated Financial Statements for further disclosure of significant accounting transactions that may have affected the quarterly operating results for each of the periods presented.

⁽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.

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Notes to the Consolidated Financial Statements

1.    Significant Accounting and Reporting Policies

The following is a summary of significant accounting and reporting policies not reflected elsewhere in the accompanying financial statements.

Principles of Consolidation The consolidated financial statements include the accounts of Herman Miller, Inc., and its majority-owned domestic and foreign subsidiaries. Effective May 29, 2004, the consolidated financial statements also include variable interest entities (VIEs) of which Herman Miller, Inc. is the primary beneficiary as further described in Note 4, Variable Interest Entities. The consolidated entities are collectively referred to as the “company.” All significant intercompany accounts and transactions, including those involving VIEs, have been eliminated in the consolidated financial statements.

Description of Business The company researches, designs, manufactures and distributes interior furnishings, primarily within workplace environments, 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. Accordingly, accounts and notes receivable in the accompanying balance sheets are principally amounts due from the dealers.

Fiscal Year The company’s fiscal year ends on the Saturday closest to May 31. The years ended May 28, 2005, May 29, 2004, and May 31, 2003, each contained 52 weeks.

Foreign Currency Translation The functional currency for foreign subsidiaries is the local currency. The cumulative effects of translating the balance sheet accounts from the functional currency into the United States dollar at current exchange rates and revenue and expense accounts using average exchange rates for the period are reflected as a component of comprehensive income (loss) in the Consolidated Statements of Shareholders’ Equity. Gains arising from remeasuring all foreign currency transactions into the appropriate functional currency, which were included in “Other Expenses (Income)” in the Consolidated Statements of Income, totaled $0.2 million, $0.1 million, and $0.9 million for the years ended May 28, 2005, May 29, 2004, and May 31, 2003, respectively.

Cash Equivalents The company holds cash equivalents as part of its cash management function. Cash equivalents include money market funds, time deposit investments, and treasury bills with original maturities of less than three months. The carrying value of cash equivalents, which approximates fair value, totaled $101.1 million and $131.9 million as of May 28, 2005, and May 29, 2004, respectively. All cash and cash equivalents are high-credit quality financial instruments, and the amount of credit exposure to any one financial institution or instrument is limited.

Short-Term Investments The company maintains a portfolio of short-term investments comprised of investment grade fixed-income securities. These investments are held by the company’s wholly owned insurance captive and are considered “available-for-sale” as defined in Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Accordingly, they have been recorded at fair market value based on quoted market prices, with the resulting net unrealized holding gains or losses reflected net of tax as a component of “Accumulated Other Comprehensive Loss” in the Consolidated Statements of Shareholders’ Equity.

All marketable security transactions are recognized on the trade date. Realized gains and losses on disposal of available-for-sale investments are included in “Interest Income” in the Consolidated Statements of Operations. Net investment income recognized in the Consolidated Statements of Operations for available-for-sale investments totaled $0.7 million, $0.5 million, and $0.9 million for the years ended May 28, 2005, May 29, 2004, and May 31, 2003, respectively.

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The following is a summary of the carrying and market values of the company’s short-term investments as of the dates indicated.

Maturities of short-term investments as of May 28, 2005, are as follows.

Accounts Receivable AllowancesReserves for uncollectible accounts receivable balances are based on known customer exposures, historical credit experience, and the specific identification of other potential problems, including the economic climate. Fully reserved balances are written off against the reserve once the company determines collection to be remote. The company generally does not require collateral or other security on trade accounts receivable.

Property, Equipment, and Depreciation Property and equipment are stated at cost. The cost is depreciated over the estimated useful lives of the assets, using the straight-line method. Estimated useful lives range from 3 to 10 years for machinery and equipment and do not exceed 40 years for buildings. Leasehold improvements are depreciated over the lesser of the lease term or the assets’ useful life, not to exceed 10 years. The company capitalizes certain external and internal costs incurred in connection with the development, testing, and installation of software for internal use. Software for internal use is included in property and equipment and is depreciated over an estimated useful life of 5 years or less. The company re-classified assets with a net carrying value of $0.4 million to current assets held for sale in the Consolidated Balance Sheet at May 28, 2005, related to a warehouse/storage facility in West Michigan that the company previously exited and expects to sell within the next fiscal year. As of the end of fiscal 2005, outstanding commitments for future capital purchases approximated $10.6 million.

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Long-Lived Assets The company assesses the recoverability of its long-lived assets in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. This assessment is performed whenever events or circumstances such as current and projected future operating losses or changes in the business climate indicate that the carrying amount may not be recoverable. Assets are grouped and evaluated at the lowest level for which there are independent and identifiable cash flows. The company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to the estimated future cash flows (undiscounted and without interest charges) expected to result from the use of the asset. If the carrying amount of the asset exceeds the expected future cash flows, the company measures and records an impairment loss for the excess of the carrying value of the asset over its fair value. The estimation of fair value is made by discounting the expected future cash flows at the rate the company uses to evaluate similar potential investments based on the best information available at that time.

Refer to Note 3, Restructuring Charges for discussion of impairments recognized during fiscal years 2004 and 2003 in connection with the company’s restructuring activities.

Goodwill and Other Intangible Assets The company is required to test the carrying value of goodwill for impairment at the “reporting unit” level annually or more frequently if a triggering event occurs under the provisions of SFAS 142, “Goodwill and Other Intangible Assets” (SFAS 142). As a matter of practice, the company performs the required annual impairment testing of goodwill during the fourth quarter of each fiscal year. The annual testing performed indicated the fair value exceeded the recorded carrying value of the company’s goodwill assets, and accordingly no impairment charge was required for the years ending May 28, 2005, May 29, 2004, and May 31, 2003. In addition, the carrying amount of goodwill during fiscal years 2005 and 2004 did not change.

SFAS 142 also requires the company to evaluate its other intangible assets to determine whether any have “indefinite useful lives.” Under this accounting standard, intangible assets with indefinite useful lives, if any, are not subject to amortization. The company has not classified any of its other intangible assets as having indefinite useful lives and, accordingly, continues to amortize them over their remaining useful lives. The company amortizes its other intangible assets using the straight-line method over periods ranging from 8 to 17 years.

Other intangible assets are comprised of patents, trademarks, and intellectual property rights with a combined gross carrying value and accumulated amortization of $9.7 million and $4.0 million, respectively, as of May 28, 2005. As of May 29, 2004, these amounts totaled $11.0 million and $5.1 million, respectively.

Estimated amortization expense for intangible assets as of May 28, 2005, for each of the succeeding five fiscal years is as follows.

Notes Receivable The notes receivable are primarily from certain independent contract office furniture dealers. These notes are the result of dealers in transition either through a change in ownership or general financial difficulty. The notes generally are collateralized by the assets of the dealers and bear interest based on the prevailing prime rate. Recorded reserves are based on historical credit experience, collateralization levels, and the specific identification of other potential collection problems. Interest income relating to these notes was $0.4 million, $0.5 million, and $0.7 million in 2005, 2004, and 2003, respectively.

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Unfunded Checks As a result of maintaining a consolidated cash management system, the company utilizes controlled disbursement bank accounts. These accounts are funded as checks are presented for payment, not when checks are issued. Any resulting book overdraft position is included in current liabilities as unfunded checks.

Self-Insurance The company is partially self-insured for general liability, workers’ compensation, and certain employee health benefits under insurance arrangements that provide for third-party coverage of claims exceeding the company’s loss retention levels. The company’s retention levels designated within significant insurance arrangements as of May 28, 2005 are as follows:

The general and workers’ compensation liabilities are managed through a wholly owned insurance captive; the related liabilities are included in the accompanying consolidated financial statements. The company’s policy is to accrue amounts equal to the actuarially determined liabilities. The actuarial valuations are based on historical information along with certain assumptions about future events. The company also accrues an estimated liability for health benefits in the accompanying consolidated financial statements based on historical claims information along with certain assumptions about future trends. Changes in assumptions for such matters as legal actions, medical costs, and changes in actual experience could cause these estimates to change in the near term.

Research, Development, Advertising, and Other Related Costs Research, development, advertising materials, pre-production and start-up costs are expensed as incurred. Research and development (R&D) costs consist of expenditures incurred during the course of planned search and investigation aimed at discovery of new knowledge useful in developing new products or processes. R&D costs also include the significant enhancement of existing products or production processes and the implementation of such through design, testing of product alternatives, or construction of prototypes. Royalty payments made to designers of the company’s products as the products are sold are not included in research and development costs, as they are a variable cost based on product sales. Research and development costs, included in “Design and Research” expense in the accompanying Consolidated Statements of Operations, were $32.7 million, $34.6 million, and $33.3 million, in 2005, 2004, and 2003, respectively. Advertising costs, included in selling, general, and administrative expense in the accompanying Consolidated Statements of Operations, were $2.7 million, $1.9 million, and $0.8 million, in 2005, 2004, and 2003, respectively.

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.

Stock-Based Compensation At May 28, 2005, the company had several stock-based compensation plans, which are described fully in Notes 15 and 16, Stock Plans and Key Executive and Director Stock Programs. The company accounts for its stock-based compensation plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. Under this method, which continues to be acceptable under Statement of Financial Accounting Standards (SFAS) No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – An Amendment of FASB Statement No. 123,” (SFAS 148), no compensation expense is recognized when stock options are granted to employees and directors at fair market value as of the grant date.

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The following table illustrates the effect on fiscal year net earnings and earnings per share if the company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” (SFAS 123) to stock-based employee compensation during the periods indicated with the Black-Scholes pricing model used for valuation of stock options.