ferris state cfa report

Ferris State Student Research This report is published for educational purposes only by

students competing in the CFA Institute Research

Challenge.

Ticker: ● MLHR Recommendation: ● Buy

Price: ● $20.67 Price Target: ● $25.08

Summary 2010 2011 2012E 2013E 2014E 2015E

Net Sales ( in mil) 1318.8 1649.2 1744 1842 1965 2103

EBIT (in mil) 53.6 123.3 138.3 151.3 165.7 185.7

Earnings per Share ($) 0.51 1.24 1.44 1.67 1.85 2.13

Source: Herman Miller 10-K statement, Ferris estimates

Highlights

We initiate coverage of Herman Miller with a buy rating and a 12-month price target of

$25.08, offering 21.3% upside from the current stock price. Herman Miller is a leader in

researching, designing, manufacturing, and distributing office furniture systems, products, and

related services. In percentage terms, Herman Miller’s main growth driver will be expansion into

international markets, with growth averaging 13.8% from 2012-2015. North America will continue

to represent nearly 70% of revenues in 2015, with steady growth coming from a continued

economic recovery, and a possible increase in market share.

Revenues and margins will continue to increase with growth coming from both domestic as well

as international. Revenues will grow at a 6.44% CAGR from 2012-2015. EBIT will expand by 40

basis points in 2012, and 90 additional basis points from 2013-2015, helped by sales growth

outpacing increases in input costs, and continued improvements in operations.

Net Cash Flow from Operations will increase, benefitting from sales growth and improving

margins. We expect this to increase from $91.1 million in 2011 to $140.9 million in 2015.

Valuation. Our discounted cash flow analysis brings us to a price target of $25.08. Within our DCF

analysis, we accounted for a base case scenario, along with a worst case and best case scenario. We

believe Herman Miller will be successful increasing sales in the United States as the economy

improves. International sales will also increase as the company expands its international presence

through its upcoming acquisition.

Main risks to our target price are: macro-economic conditions and unsuccessful product

expansion internationally. Other risks include: stronger competition, increasing raw material costs,

pension expenses, foreign exchange rate risk, exposure to the U.S. Government, and failure to

acquire POSH Office Systems.

Herman Miller Inc.

Date 1.22.21

Market Data

Market Cap

1.07 B

Shares Out. 58.16M

Float

57.36M

52 week low

$15.62

52 week high

$28.94

Beta

1.27

% of shares held:

by institutions

81.20%

by insiders

1.14%

Avg. daily vol.

379,814

(past 3 months)

Source: Yahoo! Finance

Financial Data

Forward P/E

11.19 x

PEG Ratio

0.62

Price/Sales

.61 x

Price/Book

4.25 x

EV/EBITDA

6.14 x

ROE

46.16%

ROA

10.88%

Current Ratio

2.09

BV/Share

$4.31

Dividend &

$0.09

Source: Yahoo! Finance and

Bloomberg

Stock Performance

(past 52 weeks)

S&P 500

1.6%

Herman Miller -29%

Steelcase

-33%

HNI

-18%


Office Furnishings

CFA Institute Research Challenge 1.22.12

2


Business Description

Herman Miller was founded in 1905 and is based in Zeeland, Michigan. In the 1990’s Herman Miller focused

on manufacturing efficiency and sustainability, along with expanding their product offering. Nowadays, they

are one of the leading manufacturers of office furniture and furniture systems in the United States. Since

1986, they have been ranked in the top ten in Fortune magazine’s annual top ten list of the 500 most admired

companies. Their main strengths are brand recognition, operational excellence, and their commitment to

innovation through research and design. The company maintains operations in 35 countries and has

customers in over 100 countries. A majority of the products they sell are marketed through independent

dealers, the rest of sales come from their own sales staff, dealer network, and online website. A majority of

their revenue comes from the United States, but they have increased their exposure to international markets in

the past decade. The company maintained profitably during what was arguably the greatest economic crash in

the U.S. since the Great Depression, helped by a lean manufacturing strategy that limits fixed production

costs. In 2011, Herman Miller underperformed the market, along with the rest of the furniture industry given

the volatility and uncertainty of the macro environment. However, Herman Miller saw net sales increase by

25% in 2011 as the global economy did recover. They also saw a huge EBIT improvement up 340 basis

points from 2010, primarily driven by leverage.

Product Segments: Herman Miller’s products are made up of the following categories:

-Seating: Herman Miller’s second biggest product segment, accounted for 24% of revenues in 2011. Trends

for seating have been improving as 32% of U.S. office furniture production now comes from seating, when in

2002, it accounted for only 26%. Seating categories include work, multipurpose, public, dining, patient,

outdoor, classic, stacking, and office chairs. Main brands are: Embody, Aeron, Setu, Ergon, and SAYL

seating.

-Systems: The biggest product segment that accounted for 26% of revenues in 2011. Systems include: office,

full-height wall, and healthcare systems. Annual U.S. production of systems has declined in the past decade,

but we expect Herman Miller to capture additional market share, specifically in the healthcare space with

their award winning Compass System. Also, their recent acquisition of Brandrud and Nemschoff gives them

the industry’s most complete healthcare offering. Herman Miller’s main systems include: Canvas Office

Landscape, EthoSpace System, and My Studio Environments.

-Freestanding and Storage: Accounted for 19% of revenues in 2011. Main products include: office storage

cabinets, healthcare carts, home office desks and storage, and tables used in many different settings. Top

brands are: Abak, Intent, Envelope, Meridian, and Tu.

-International: Representing 16% of revenues in 2001, it has grown to account for 23% in 2011. We expect

this trend to continue as Herman Miller is focused on increasing its international presence. The company has

determined that disclosure of individual country information within its international operations is not

practical. The change in accounting information has made it difficult to analyze foreign countries sales.

Figure 1: Revenue base

FY 2011

Int'l 23%

Health,Home &Edu. 24%

US Office &Gov 53%

Source: Herman Miller’s 10-K statement

Figure 2: Product mix

Source: Herman Miller’s 10-K

statement


3

-Other: This product segment is made up of miscellaneous product sales and service sales that are not

categorized. This is the smallest segment of Herman Miller’s revenues, making up only 8%.

Operating Segments: Herman Miller reports three operating segments described below.

-North American Furniture Solutions: This includes the operations associated with the design,

manufacture, and sale of furniture products for work-related settings, including office, education, and

healthcare environments, throughout the United States and Canada. This segment accounted for 74% of the

company’s revenue in 2011.

-Non-North American Furniture Solutions: This includes the operations associated with the design,

manufacture, and sale of furniture products, primarily for work-related settings, for Mexico and outside of

North America. This segment accounted for 18% of revenues in 2011.

-Specialty and Consumer: This includes the operations associated with the design, manufacture, and sale of

high-end furniture products including Geiger wood products, Herman Miller Collection products, and their

North American consumer retail business. This segment was introduced by the company in the first quarter

of their 2012 fiscal year. The company re-stated its financial statements for 2011 to include this segment,

where it accounted for 8% of revenues.

Company strategy going forward: Herman Miller’s biggest growth opportunity will come from Asia

(inclusive of India) and Latin America where they currently have limited exposure. To increase their

exposure and support growth, the company is acquiring POSH Office Systems located in Hong Kong. This

acquisition gives them direct access to the Chinese market. Non-North American sales were 17.6% of the

company’s revenue in 2011, and we expect this to increase to 23.2% by 2015. In the U.S. and Canada,

Herman Miller will look to increase sales by offering superior products and an extensive product pipeline.

North American sales represented 74.3% of revenues in 2011. This is expected to decrease to 68% in 2015.

Industry Overview and Competitive Positioning In this section, we analyze the three main markets where Herman Miller will operate in the immediate future:

United States, China, and Latin America.

United States: a volatile market. Herman Miller, like the rest of the office furniture industry, is greatly

dependent on U.S. commercial activity and the conditions of the economy. The United States market in the

past five years has seen an incredible amount of volatility, due to the financial crisis of 2008. Consequently,

the office furniture manufacturing industry has suffered tough conditions during those five years. Low

business sentiment and high unemployment following the recession have created little impetus for office

furniture demand since 2006. Meanwhile, rising import penetration from China has further hurt sales, since

the country is able to produce goods at much lower costs. Fortunately, demand conditions are slowly

improving, as the U.S. economy recovers from the recession and businesses expand operations. As the

number of businesses increases and companies hire more employees, total industry revenue is expected to

increase.

The leading economic indicators most highly correlated to Herman Miller’s sales from 2002-2011 were CEO

sentiment, the Architectural Billings Index (ABI), and corporate profit levels. Current CEO sentiment can be

characterized as cautiously optimistic with most survey levels near 2 year highs. ABI readings continue to

improve from 2009, indicating growth in non-residential construction activity. Corporate profitably is strong

and companies have a lot of cash on their balance sheets. (Please see Appendix #5 for detailed results)

As economic conditions improve, the number of businesses and white-collar jobs are projected to rise

through 2016, leading to more industry sales. However, BIFMA projects that total production for the U.S.

office furniture market will decrease by 1.7% in 2012 from 2011. Given this challenging environment,

Herman Miller’s future sales will partly come from taking market share from their competitors. Additionally, sales should benefit from the small growth in the office furniture market of the United States in the long term.

We estimate Herman Miller’s current market share to be around 12.5% in the U.S. in 2010 and 14% in 2011.

We expect this trend to continue as Herman Miller expands its product portfolio. Herman Millers top U.S.

competitors are Knoll, Steelcase, HNI and privately owned Haworth. Their main competitor is Knoll as both

companies compete in the high end price segment. Herman Miller also must pay close attention to Steelcase who competes in the lower end segment, and has the highest market share in the U.S. at 21% in 2011.

Figure 3: Sales by segment

Source: Herman Miller 10-K report

Figure 4: Estimated market share

Source: Ferris estimates based on BIFMA statistics

Figure 5: Annual % change in U.S. office furniture production

Source: BIFMA

Figure 6: U.S. unemployment rate

Source: tradingeconomics.com

09 10 11


4

China: high growth market. The overall Chinese furniture market has seen rapid growth over the past

decade, helped by increased living standards and a thriving real estate market. To put it into perspective, the

annual output of China’s furniture industry in 1978 was 1.3 billion Yuan. In 2006, it had exploded to over

400 billion Yuan (According to the National China Furniture Association). Obviously, this is not all office

furniture, but the growth of China’s overall furniture market is undeniable. Each year, China completes

infrastructure area of 1.2 billion square meters. This increase in infrastructure will drive demand for office,

healthcare, and educational furniture, among other products.

The biggest markets in China for office furniture are in the cities of Shanghai, Hong Kong, and Beijing.

These cities act as platforms for companies to expand into other areas of the country because of their good

distribution channels. Herman Miller currently has a manufacturing facility and design center near Shanghai.

Their acquisition of Hong Kong based POSH Office Systems will be crucial for them to expand their

international sales. With an expanded product offering in China, they can then look to expand into other

markets where they are currently absent. There is considerable Chinese competition, however. Many of

Herman Miller’s U.S. competitors have already acquired Chinese office furniture companies. Overall, the

Chinese furniture market is scattered, with room for companies to grow as overall growth remains high.

Latin America: great potential. Brazil is the largest producer and consumer of office furniture in Latin

America, followed by Argentina, Venezuela, and Colombia. Furniture companies in Brazil are very

fragmented, and a majority of the companies have less than 50 employees.

Herman Miller currently operates in Brazil, but would like to expand its sales not just in Brazil, but to other

countries in Latin America as well. An acquisition would allow Herman Miller easy access to these markets.

However, Herman Miller has not stated what their plans are for Latin America in particular. For now, their exposure remains relatively small.

Additionally, emerging countries are seeing white collar growth. In India, white collar growth is coming

from both the urbanization of the country as well as outsourcing. White collar growth will increase the

demand for office furniture as more offices and staff are needed to keep up with the rising demand. The

Indian market presents a big opportunity for office furniture manufacturers. In fact, the Indian furniture industry was recently estimated at around 350 billion Indian Rupees, or 6.8 billion U.S. Dollars.

Herman Miller’s competitive positioning.

Globally positioned manufacturing operations: In the United States, Herman Miller has manufacturing

facilities in four different states; Michigan, Georgia, Iowa, and Wisconsin. In Europe, they have a

manufacturing presence in the U.K. In Asia, they have a manufacturing plant in Ningbo, China (near

Shanghai). These locations give Herman Miller access to the global market.

Lean manufacturing: In 2009, Herman Miller underwent a restructuring in order to reduce their operating

expenses, which also improved efficiency and profitably. This restructuring included moving from five

manufacturing plants with three shifts to one manufacturing plant with one shift. Several years ago, Herman

Miller also began to change their operations. On the plant floor, assembly lines are constantly reviewed in an

effort to improve operations. Also, Herman Miller has an established relationship with Toyota Supplier

Support Centers that has helped them implement their world class, lean manufacturing processes that as a

whole are known as the Herman Miller Performance Systems. This lean production allows for reduced inventories and space while at the same time increasing throughput.

Brand recognition: Herman Miller’s name is recognized as a leader in design and sustainability. Designing

solutions to meet customer needs is at the forefront of their strategy. Once the acquisition of POSH Office

Systems is completed, the company will look to leverage their brand name into China and eventually other countries.

Innovation: Herman Miller is an innovator of furniture design, and has a unique commitment to employee relations and the environment. Research and design is at the heart of this innovation.

Figure 7: Forecasted GDP per capita %

change

Source: IMF forecast

Figure 8: U.S. furniture imports by

country

Source: worldfurnitureonline.com

Figure 9: 10 year stock price


Figure 10: Net Operating Cash Flow

(In USD millions)

Source: Ferris estimates


5

Investment Summary We initiate coverage of Herman Miller with a buy rating and a 12-month price target of $25.08, offering

21.3% upside from the current stock price. Herman Miller is a leader in researching, designing,

manufacturing, and distributing office furniture systems, products, and related services. The stock is currently

up 130% from its 10 year low on March 6, 2009.

Herman Miller’s management team is looking to increase sales in Asia and Latin America. They see plenty of

opportunity in these international markets. This is supported by their acquisition of POSH Office Systems in

Asia that is expected to close in the spring of 2012. Also, Herman Miller has made a recent push into the

healthcare furniture industry. Over the past ten years, they have gone from 9% to 24% of sales coming from

the health, home and education sector. As a result, we believe total revenues will grow at a 6.44% CAGR.

Also, EBIT will expand by 90 basis points from 2012-2015 as sales growth outpaces input costs.

Due to sales growth and improving margins, we expect Net Cash Flows from Operations to increase from

$91.1 million in 2011 to $140.9 million in 2015.

Our 12 month price target of $25.08 is based on a Discounted Cash Flow approach using a scenario analysis.

We used a base case, best case, and worst case analysis. We then weighted each outcome based on the future

economic outlook. This captures the benefits and risks apparent to the firm in our valuation.

The main risks associated with Herman Miller are: the conditions of the macro economy and inability to

expand into foreign countries. Herman Miller is very cyclical with the overall condition of the economy. If

there is another recession, they would see large drops in sales due to lack of new jobs and office creation.

Also, if Herman Miller is not able to expand into foreign markets as expected, their sales levels would

increase at much slower rates than currently forecasted.

Figure 1: Herman Miller news flow for past 12 months.

S

o

u

r

c

e

:

Y

Yahoo! Finance

Herman Miller

announces

agreement to acquire POSH

Office Systems

Raymond James cuts

price target

Europe woes bring down entire market

Fiscal Year

2011 net sales

up 25.1% YoY

2012 Q2 sales

miss estimates

Figure 15: Sales and EBIT ($ mil)

Source: Herman Miller 10-K

statement, Ferris estimates

Figure 17: EBIT and NOP margin



6

Valuation Our valuation is done by applying the Discounted Cash Flow approach to Herman Miller. The company does

not give out individual country information for its international business because none of the foreign

countries in which they operate are considered material enough to disclose based on quantitative and

qualitative factors. Therefore, we value Herman Miller’s assets as a whole. Valuations are made according to

the following assumptions.

Sales: will reach over $2 billion in 2015, growing at a 6.44% CAGR as the economy continues to recover. By

2015, Herman Miller will become more diversified across operating segments as Non-North American sales

increase from 18% to 23.2% of total revenue. Conversely, North American sales will decrease from 74.3% of

sales to 68% in 2015.

Capex: will continue to be important going forward. We estimate capital expenditures to be around 2.1% of

sales annually through 2012-2015.

Discounted cash flow analysis:

Our DCF analysis puts Herman Miller’s 12-month price target at $25.08. Within our DCF analysis, we

accounted for a base case scenario, along with a worst case and best case. For each scenario, FCF amounts

for 2012-2015, as well as terminal FCF are changed to appropriately reflect each scenario. We then assigned

a probability to each scenario and came up with our weighted average price. The three scenarios and their

assumptions are described below.

Base Case Scenario: Our base case scenario values Herman Miller at $25.88. This scenario is the price we get under normal

conditions. Normal conditions meaning nothing major happening that would impact the company’s business,

GDP growth rates, or other economic factors. This would be our price target under a normal DCF analysis.

However, we feel that we need to capture risks and opportunities that are not present under the base case

conditions. This brings us to our worst and best case scenarios.

Worst Case Scenario:

Our worst case scenario values Herman Miller at $15.76. This scenario captures the risk of a global recession,

which we feel is very possible given the current situation of the global economic environment, particularly in

Europe. Under this case, companies would significantly cut back their spending on office furniture products.

The following assumptions are made regarding the worst case scenario.

We assume Herman Millers sale will decline at a -10% CAGR from 2012 to 2015, with sales bottoming out

near $1.15 billion, keeping them above recession levels of 09/10. We kept sales above the recent recession

levels because it was arguably the most severe collapse since the Great Depression. In addition, companies

have learned from this and are much leaner now. For terminal FCF, we assume this to be 25% lower than the

10 year historical average of $86.1 million.

Best Case Scenario:

Our best case scenario values Herman Miller at $34.53. This scenario captures the added sales Herman Miller

would see, given stronger than expected growth in the United States and the rest of the world. The following

assumptions are made regarding the best case scenario.

Herman Miller sales will rise at a 14.8% CAGR from 2013-2015, just as they did from 1977-2000. Terminal

FCF is assumed to be 30% higher than the $96.9 million FCF obtained under the base case scenario in 2015.

In the best and worst case scenarios, revenue amounts and free cash flows are changed to better reflect

valuations under each scenario. Other parts of the income statement and balance sheet we assume remain

unchanged (in percentage to sales).

Our three scenarios give us three very different price targets. To capture all three, we assigned probabilities to

each to come up with a weighted average price. We assign a 55% probability to the base case, a 25%

probability to the worst case, and a 20% probability to the best case scenario. These probabilities stem from

current economic forecasts, but have been adjusted to reflect what we feel is appropriate.

FCF and terminal value amounts, as well as WACC assumptions are summarized in Appendix #4.

Figure 13: Valuation

Price Target 25.08$

Base Case 25.88$

Worst Case 15.76$

Best Case 34.53$ Source: Ferris estimates

Figure 14: Probabilities assigned to each scenario

Probabilities

Base Case 55%

Worst Case 25%

Best Case 20% Source: Ferris estimates

Figure 11

DCF characteristics

2012-2015 FCF +

Perpetuity Source: Ferris estimates

Figure 12

Perpetuity characteristics

WACC 7.04%

growth rate 1.075% Source: Ferris estimates

Figure 16: Long-term debt ($ mil)



7

Financial Analysis

Revenue and EBIT: In North America, fiscal 2011 net sales totaled $1.65 billion, a 25.1% increase from

2010. All sectors of the North American business saw growth in sales. EBIT was $123.3 million (7.5% of

sales) in 2011, representing a huge 130% increase from just a year ago as the economy recovered. We expect

Herman Miller net sales to grow to $1.74 billion, and EBIT to reach $138.2 million in fiscal year 2012.

Margins will improve slightly due to sales growth outpacing input costs. We expect the cost of direct

materials to grow at a rate below the 6.44% CAGR sales growth, with added benefit coming from continued

operational efficiencies in direct labor, and overhead costs benefitting from increased leverage from higher

sales volume (Direct materials price forecasts are provided in Appendix #7). We assume SG&A expenses to

be around 22% of sales going forward. Accordingly, EBIT margin of 7.5% in 2011 will increase to 8.8% in

2015.

EPS: Diluted EPS was $1.06 for fiscal year 2011. We expect this to increase by 36% to $1.44 for 2012, and

to $2.13 by 2015.

Cash Flow: net operating cash flow will increase from sales growth and margins. In 2011, net operating cash

flow was $91.1 million, and we predict this will reach $140.9 million in 2015. In percentage terms,

OCF/Sales will increase to 6.7% in 2015. This increase in cash flow will be used to help finance capital

expenditures totaling $159 from 2012-2015. We also expect Herman Miller to continue with acquisitions to

help grow their business. We expect acquisitions to total $90 million from 2012-2015.

Balance Sheet & Financing: The balance sheet is expected to improve as the company looks to de-risk its

balance sheet by funding future pension obligations. Also, Herman Miller has reduced their long term debt.

They had $375 million in long term debt in 2008. They currently have $250 million worth of debt, with the

next payment not due until 2015.

Changes in operating segment mix: Herman Miller will further diversify its geographic mix as its growth

from overseas will outpace its growth from North America. Non-North America will increase to 23.2% in

2015. Additionally, the Specialty and Consumer segment will increase to 8.8% in 2015 with higher sales

coming from the Herman Miller Collection.

Corporate Governance and Sustainability It is our opinion that corporate governance and sustainability is the cornerstone of all moral and ethical

business practices. Firms with strong corporate governance and sustainability enhance their business

relationships and practices, enabling the firm to grow and prosper within their respective business sectors.

Corporate Governance

Herman Miller believes “a proper structure, appropriate policies and procedures, and reflective cultural

factors provide the cornerstone to good governance”1. Accordingly, they believe their reputation is a

priceless asset. To secure the safety of their reputation and proper governance, Herman Miller strives to

“consistently operate at the highest standards of business.”2 To ensure compliance, Herman Miller publishes

their governance by-laws on the corporation’s website and they are reviewed on an annual basis by the

Nominating and Governance Committee of the Board of Directors of the company; a report of findings and

recommendations is presented to the Board. The internal governance of the firm has earned Herman Miller a

conservative accounting and governance risk (AGR) rating in the 92nd percentile and an equity risk factor of

4. Results are reported in Appendix #6.

Sustainability

Environmental Sustainability is a key issue in the office furniture manufacturing sector. And within the

sector, Herman Miller is seen as one of the leaders in sustainability. Since 1991, Herman Miller has been

recognized for their environmental conscious practices. Herman Miller is dedicated to reducing its carbon

footprint. Presently, they strive for economic, environmental, and social equity through their “Perfect Vision”

initiative outlined in their Better World Report. The main goals of the initiative are to reduce landfill,

hazardous waste, air emissions, and process water use to zero by the year 2020.

Herman Miller’s efforts for a better world have earned them a wide variety of recognitions: ranked #1 in

FORTUNE’s “Most Admired” companies survey, eight consecutive listings in the Dow Jones Sustainability

Index, Social Innovation Award for “Best Sustainability Performance”, EPA WasteWise Award for Green

1 http://www.hermanmiller.com/MarketFacingTech/hmc/about_us/Investors/shared_assets/HMI_2011_PROXY_STATEMENT.pdf 2 http://www.hermanmiller.com/About-Us/For-Our-Investors/Corporate-Governance

Figure 18: Earnings per share ($)

Source: Herman Miller 10-K, Ferris estimates

Figure 19: Segment revenues ($)

Source: Ferris estimates

Figure 20

Environment 0 lbs of waste by 2020

88% overall footprint reduction

100% green energy usage

Community 3 yr goal of 45,000 hoursof community service

437,225 miles saved bycar/bike pooling

Social Programs Spring fashion show for local womens center

Distribute school supplies

to West Michigan children

CG and Sustainability

Source: Herman Miller website

Figure 21: Aluminum spot price in US

Dollars per metric ton (monthly)

0.00

1,000.00

2,000.00

3,000.00

4,000.00

Source: indexmundi.com


8

Purchasing, a “Sector Leader” and “Sector Mover” in Sustainable Asset Management (SAM) “Sustainability

Yearbook 2011”, and a perfect score for the four straight year in the Human Rights Campaign’s Corporate

Equality Index.

Investment Risks

Failure to penetrate growth markets of Asia and Latin America. Herman Miller sees its biggest growth

opportunities in the next five years coming from Asia and Latin America. If they are unsuccessful in

executing their international strategy, this would have an adverse effect on top line growth.

Macro-economic conditions: Much of Herman Miller’s sales are dependent on U.S. commercial activity.

CEO sentiment, the Architectural Billings Index, and corporate profit levels are the most highly correlated to

Herman Miller’s sales, according to our correlation analysis. Given the cyclical nature of Herman Miller’s

business, a slowdown in commercial activity would severely hurt sales. Their manufacturing strategy does

help to control costs, and gives them the ability to maintain profitability in bad times. On the other hand, a

stronger economy would improve revenue and margins.

Increase in raw material costs: Steel, plastic, textiles, wood particleboard, crude oil and aluminum make up

Herman Miller’s raw material costs. They do not hedge these costs. Steel is the biggest raw material cost for

Herman Miller. Spot aluminum prices are near two year lows and steel prices are near three year lows.

However, these raw material costs will almost certainly increase given a stronger economy. Sometimes to

offset rises in these costs, Herman Miller will implement price increases, as they did this past year.

The U.S. Government: Accounting for 14% of Herman Miller’s net sales in fiscal year 2011, Herman Miller

sells to the U.S. government both through a GSA Multiple Award Schedule Contract and through competitive

bids. There is some risk of Herman Miller losing sales from either changing laws or changes in government

budgets. The company maintains that whoever wins the 2012 election would not impact any material

renegotiation of contracts.

Stronger competition: Herman Miller operates in a competitive business environment. Should competition

take market share from Herman Miller, they may need to increase marketing or reduce prices, either of which

would impact margins. However, we believe this risk is partially mitigated as Herman Miller has strong

brand recognition. Internationally, competition is strong both from Herman Millers’ U.S. competitors who

have already established themselves in China, and from domestic Chinese companies.

Employee health benefits and pension expenses: Future funding obligations could be impacted by changes

in interest rates, equity securities held under employee benefit plans, and changes in laws and regulations.

Pension expense non-current liabilities have averaged 78.3 million the past two years. Herman Miller plans to

use cash to increase its funding to its pension obligations in the future, so they can reduce the risk of their

balance sheet. In 2011, other liabilities were $87.2 million, down from $176.3 million in 2010.

Foreign exchange rate risk: 77% of Herman Miller’s revenue came from North America and 23% came

from internationally in 2011. The 23% international and a portion of the North American revenue coming

from Canada expose them to exchange rate risk. The currency having the most effect on earnings in recent

years has been the Canadian Dollar. Other currencies that could affect operating earnings are the U.S. Dollar

paired against the: Australian Dollar, British Pound, Euro, Mexican Peso, Japanese Yen, and Chinese Yuan.

To help minimize this risk, Herman Miller buys forward contracts to control P&L, and their manufacturing

strategy gives them protection by acting as a natural hedge. Nevertheless, margins could be impacted in the

future.

Failure to acquire POSH Office Systems: If Herman Miller does not successfully acquire POSH, it would

make it more difficult for them to increase their international presence as POSH offers them direct access to

the Chinese market. However, they do have a manufacturing plant currently in China. Even though the deal is

taking longer to go through then initially thought, it has allowed Herman Miller to make adjustments that will

better position them for long term success in the country. Herman Miller expects the deal to close in the

spring of 2012 and sees little risk at this point.

Figure 22: Global steel prices in US Dollars per ton (past 3 years)

0

500

1000

1500

2000

2500

3000

3500

4000

4500

Mar

-09

Jul-

09

Nov

-09

Mar

-10

Jul-

10

Nov

-10

Mar

-11

Jul-

11

Nov

-11

Global Composite Stainless Steel

Global Composite Carbon Steel

Source: worldsteelprices.com

Figure 23: CEO confidence on

global economy

Source: PwC Global CEO confidence survey


9

Appendix 1: Income Statement (in millions except EPS)

company's fiscal year 2010 2011* 2012E 2013E 2014E 2015E

Net Sales 1318.8 1649.2 1744 1842 1965 2103

% growth -19.1% 25.1% 5.7% 5.6% 6.7% 7.0%

By Operating Segment

North American 1096.1 1224.8 1263 1312 1368 1430

% growth 3.1% 3.9% 4.3% 4.5%

Non-North American 222.7 290.4 327 372 425 488

% growth 12.60% 13.76% 14.25% 14.82%

Specialty and Consumer - 134 146 158 172 185

% growth 9.0% 8.2% 8.9% 7.6%

Cost of sales 890.3 1111.1 1168 1232 1312 1400

% sales 67.5% 67.4% 67.0% 66.9% 66.8% 66.6%

Gross Margin 428.5 538.1 576.0 610 653 703

% of sales 32.5% 32.6% 33.0% 33.1% 33.2% 33.4%

Selling, general, and admin. 334.4 369 388.9 407.1 432.3 458.5

% sales 25.4% 22.4% 22.3% 22.1% 22.0% 21.8%

Design and research 40.5 45.8 48.8 51.6 55.0 58.9

% sales 3.1% 2.8% 2.8% 2.8% 2.8% 2.8%

Operating Earnings 53.6 123.3 138.3 151.3 165.7 185.7

% of sales 4.1% 7.5% 7.9% 8.2% 8.4% 8.8%

Interest expense 21.7 19.9 18.7 15 17 18

Interest/investment income (4.6) (1.5) (0.7) 0.5 (0.1) (0.2)

Other, net 1.7 2.4 1.9 1.8 1.7 1.7

Earnings before taxes 34.8 102.5 118.4 134.0 147.1 166.2

% of sales 2.6% 6.2% 6.8% 7.3% 7.5% 7.9%

Income Tax Expense 6.5 31.7 34.9 36.8 39.3 42.1

Net Earnings 28.3 70.8 83.5 97.2 107.8 124.1

Net Profit Margin 2.1% 4.3% 4.8% 5.3% 5.5% 5.9%

Earnings Per Share -Basic 0.51 1.06 1.44 1.67 1.85 2.13

*As of Q1 12, Herman Miller changed the way it reports its operating segments. The company only revised

its numbers one year back. Therefore, 2010 numbers are only comprised of N.A. and non N.A. since exact

amounts are not known for Specialty and Consumer.


10

Appendix 2: Balance Sheet (in millions $)

2010 2011 2012E 2013E 2014E 2015E

Cash and equivalents 134.8 148.6 156.2 158.1 169.8 184.6

Marketable securities 12.1 11.0 11.6 11.7 12.6 13.7

Accounts receivable, net 144.7 193.1 191.8 202.6 216.2 231.3

Inventories, net 57.9 66.2 69.3 72.5 75.8 79.3

Prepaid expenses and other 46.4 59.2 58.0 59.2 60.4 61.6

Total Current Assets 395.9 478.1 486.9 504.1 534.7 570.5

Fixed Assets 175.2 169.1 173.1 175 178 182

Goodwill 132.6 133.6 134.7 135.7 136.8 137.9

Other amortizable intangibles, net 25 24.3 28.0 28.6 29.1 29.7

Other assets 41.9 9.3 25.6 25.9 26.1 26.4

Total Assets 770.6 814.4 848.3 869.2 904.8 946.5

Unfunded checks 4.3 6.4 5.4 5.4 5.5 5.5

Current maturities of LT debt 101.2 - - - - 50

Accounts payable 96.3 112.7 122.1 128.9 137.6 147.2

Accrued liabilities 112.4 153.1 172.3 180.9 190.0 199.5

Total Current Liabilities 314.2 272.2 299.7 315.3 333.0 352.2

Long term debt 200 250 250 225 225 200

Other liabilities 176.3 87.2 86.8 79.3 70.1 67.0

Total Liabilities 690.5 609.4 636.6 619.5 628.0 619.2

Common stock (.2 par value) 11.4 11.6 11.6 11.7 11.7 11.8

Additional paid-in capital 55.9 82 69.0 55.2 55.2 55.2

Retained earnings 152.4 218.2 242.2 292.8 318.9 368.3

Accumulated other comprehensive loss (136.2) (104.2) (108.0) (106.9) (105.9) (104.8)

Key executive deferred compensation (3.4) (2.6) (3.0) (3.1) (3.1) (3.2)

Total Shareholders Equity 80.1 205 211.8 249.7 276.8 327.3

Total Liabilities and SE 770.6 814.4 848.3 869.2 904.8 946.5


11

Appendix 3: Statement of Cash Flows (in millions $)

2010 2011 2012E 2013E 2014E 2015E

Net Income 28.3 70.8 83.5 97.2 107.8 124.1

Depreciation, Depletion, Amortization 42.6 39.1 38.2 37 35.4 32

Deferred income taxes (1.5) 24.2 11.4 11.3 11.2 11.1

Total other cash flow 24.9 (29.5) (17.6) (10.5) (7.6) (6.8)

Funds From Operations 94.3 104.6 115.5 135.0 146.8 160.4

Receivables 9 (48.5) 0.7 (7.1) (12.7) (16.5)

Inventories (7.1) (8.3) (3.1) (3.3) (3.3) (3.5)

Accounts payable 13.9 16.4 9.7 3.6 8.1 10.5

Other accurals (34.6) 41.4 (19.2) (8.6) (9.1) (9.5)

Oher assets/liabilities 23.6 (14.5) 6 (6.4) (2.1) (0.5)

Funds from/for other Operating Activities 4.8 (13.5) (5.9) (21.8) (19.1) (19.5)

Net Cash Flow- Operating Activities 99.1 91.1 109.6 113.2 127.7 140.9

Increase in investments (16.3) (3.1) (7.9) (9.1) (5.5) (5.3)

Decrease in investments 16.4 4.4 8.7 10.9 4.4 3.4

CAPEX (22.3) (30.5) (36.0) (38.0) (41.0) (44.0)

Disposal of fixed assets 0.7 1 0 0 0 0

Net Assets from acquisitions (46.1) 0 (30.0) (25.0) (20.0) (15.0)

Other sources (uses)-investing (10.0) (3.2) (5.0) (2.0) (1.0) (1.0)

Net Cash Flow - Investing Acitivities (77.6) (31.4) (70.2) (63.2) (63.1) (61.9)

Long term borrowings 0 50 0 0 0 0

Reduction in long term debt (75.0) (100.0) (25.0) 0 0 (50.0)

Net proceeds from sale/issue of stock 2.5 8.6 5.6 5.8 5.8 5.8

Stock redeemed, retired, converted,etc. (0.8) (1.0) (2.0) (14.1) (14.1) (14.1)

Cash dividends paid (4.9) (5.0) (5.0) (5.0) (5.0) (5.0)

Other sources (uses)-financing (0.7) (2.8) (1.7) (2.0) (2.4) (2.4)

Net Cash Flow - Financing Activities (78.9) (50.2) (28.1) (15.3) (15.7) (65.7)

Effect of exchange rate on cash (0.70) 4.30 2.50 1.50 1.50 1.50

Increase/Decrease in Cash and equilvalents (58.1) 13.8 13.8 36.2 50.3 14.7


12

Appendix 4: DCF Assumptions

Terminal Value: We calculated FCF’s up until year 2015. After that, we resort to terminal values to compete our analysis. The terminal

values are based on different assumptions from our worst, best, and base case scenarios. Our terminal growth rate is set at 1.075%. We

found this by taking a weighted average between the average U.S. GDP percent growth rate of .82% for the past five years and the fifteen

year annualized return of the S&P 500 of 1.33%. Any terminal growth rate higher than market returns assumes that Herman Miller’s cash

flows would outpace the economy which we do not feel is appropriate in the long run.

Weight Average Cost of Capital.

Description:

WACC 7.08%

Cost of Debt 6.24% Average cost of outstanding debt (after tax cost of debt used in wacc formula)

Series A senior notes (due Jan. of 2015) 5.94% 20% of debt

Series B senior notes (due Jan. of 2018) 6.42% 60% of debt

Debt securities (due March of 2021) 6.00% 20% of debt

Tax Rate 33% Tax rate taken from Herman Miller's 10-Q report

Cost of Equity 10.24% CAPM Model

Risk free rate 1.92% Yield on 10 yr U.S. Treasury Note as of 1/13/12

Market risk premium 6.04% Implied equity risk premium on 1/1/12 (Source:http://pages.stern.nyu.edu/~adamodar/)

Beta 1.27 As of 1/13/12 (Source: Yahoo! Finance)

Country risk premiums 0.005 country's default spread * relative market volatility for that country (Source: Damodoran)

Gearing Ratio (Total D/E) 1.09 Source: advfn.com

Weight of Debt 52.2%

Weight of Equity 47.8%

Country risk premium =(avg Europe risk premium*3% of MLHR revenues) + (avg premium of China, India, Brazil, Japan, and Mexico*20% of MLHR rev)

A detailed analysis of our worst, best, and base case scenarios is shown below.

(in millions, except per share data) 2010 2011 2012E 2013E 2014E 2015E

Cash Flow From Operations 99.1 91.1 109.6 113.2 127.7 140.9

CAPEX 22.3 30.5 36 38 41 44

% of sales 1.7% 1.8% 2.1% 2.1% 2.1% 2.1%

FCF 76.8 60.6 73.6 75.2 86.7 96.9

PV Perpetuity 1327.9 1630.4

PV of 2012-2015 278.6

PV of FCF's 1606

plus Cash 148.6

minus Debt 250

Equity Value 1505.1

divide shares outstanding 58.16

Fair Value/share 25.88$

Base Case Scenario

Free Cash Flow Formula = (terminal FCF* perpetuity growth rate) / (wacc-perpetuity growth rate)


13



CAPEX 22.3 30.5 36 25 25 25

FCF 76.8 60.6 49.0 50.6 28.0 26.0


PV of 2012-2015 132.5

PV of FCF's 1018

plus Cash 148.6

minus Debt 250

Equity Value 916.4



Worst Case Scenario



CAPEX 22.3 30.5 36 38 41 44

FCF 76.8 60.6 89.4 115.0 104.3 149.8


PV of 2012-2015 382.7

PV of FCF's 2110

plus Cash 148.6

minus Debt 250

Equity Value 2008.2



Best Case Scenario


14

Appendix 5: Economic Indicators

Some of the leading economic indicators that are thought to influence the office furniture industry are compared against Herman Miller’s

year over year sales changes from 2002-2011 to see how much correlation, if any, each indicator has Herman Miller’s sales.

Herman Miller CEO unemployment office Architectural corporate profits

Year sales % change confidence rate vacancy rates Billings Index (% change YoY) (% change YoY)

2002 -9.0% 26% 6.0% 14.5% -6.7% 4.6%

2003 0.1% 31% 5.7% 16.5% 9.5% 12.1%

2004 13.2% 41% 5.4% 16.3% 8.7% 32.2%

2005 14.6% 45% 4.9% 15.3% -4.0% 29.0%

2006 10.5% 52% 4.4% 13.8% 6.3% 10.5%

2007 4.9% 50% 5.0% 12.8% 11.8% -6.6%

2008 -19.0% 21% 7.3% 12.8% -12.3% -9.4%

2009 -19.1% 31% 10.0% 15.0% -32.0% 6.9%

2010 25.1% 48% 9.4% 17.2% 26.5% 13.7%

2011 5.7% 40% 8.5% 17.4% 32.3% n/a

Correlation 0.82 -0.25 0.49 0.74 0.61

Sources: Herman Miller stock price - Yahoo! Finance Strong Correlation .7 and above

CEO confidence - PwC Global CEO cofidence survey Moderate Correlation .3 through .7

unemployment rate- tradingeconomics.com Weak Correlation 0 through .3

office vacancy rates - calculatedriskblog.com

ABI - calculatedriskblog.com

corporate profits (after-tax) - Ycharts.com

Appendix 6: Corporate Governance and Sustainability

The following charts shows how Herman Miller stacks up against its peers in the Accounting and Governance Risk (AGR) Rating. Like

most of its peers, it has received a conservative rating, ranking it in the top 8 percentile.

CompanyGMI AGR

RatingPercentile

Equity Risk

FactorValuation

Herman

Miller

[MLHR]

Conservative 92nd 4 Out-perform

HNI Corp

[HNI]Conservative 87

th 5 Best

Knoll

[KNL]Average 50

th 3 Average

Kimball

Intl.

[KBALB]

Conservative 99th 5 Best

SteelCase

[SCS]Conservative 90

th 4 Out-perform

Source: Governance Metrics International (GMI)


15

Appendix 6:

2011 2012E 2013E 2014E 2015E

North America 74.3% 72.4% 71.2% 69.6% 68.0%

Non-North America 17.6% 18.8% 20.2% 21.6% 23.2%

Specialty & Consumer 8.1% 8.4% 8.6% 8.8% 8.8%

More diversified revenue stream

Source: Herman Miller 10-K Statement, Ferris estimates

Appendix 7: Direct materials prices and forecasts

Steel Futures Aluminum Futures (per ton) Lumber ICE Brent Crude

Price as of 1-21-12 550 2180.5 253 109.8

Forecasted 2012 price 509 2408 265 115

Forecasted 2013 price 565 2508 290 121.25

CAGR 1.35% 7.25% 7.06% 5.08%

Total avg CAGR 5.19%

Source: London Metals Exchange London Metals Exchange BMO Capita l JP Morgan Steel futures are expected to increase only slightly as a major component of steel, iron ore, is projected to remain low for the next few

years. Aluminum is currently expecting a 7.25% CAGR for prices in the next 2 years in the futures market, which is consistent with the

aluminum forecast from Goldman Sachs. Lumber is also expected to increase as the housing market appears to have bottomed and be on

the rebound. Almost all investment firms researched see ICE Brent Crude increasing in the future. We used JP Morgan’s forecast of 5.08%

CAGR.

We found the total average CAGR for Herman Millers direct material costs to be 5.19%. This is below our sales growth forecast of 5.7% in

years 2012 and 2013. We did not include forecasts for 2014 or 2015 simply because there are very few forecasts that extend that far and

they are more likely to be inaccurate.

Appendix 8:

Significant Financial Ratios

2010 2011 2012E 2013E 2014E 2015E

Profitability Ratios

EBIT Margin 4.1% 7.5% 7.9% 8.2% 8.4% 8.8%

Return on Sales 2.1% 4.3% 4.8% 5.3% 5.5% 5.9%

Return on Worth 35.3% 34.5% 40.8% 42.3% 40.5% 39.2%

Gearing Ratio

Total Debt to Equity 2.5x 1.22x 1.18x .98x .81x .61x

Cash Flow Ratios

OCF over Sales 7.5% 5.5% 6.3% 6.2% 6.5% 6.7%

OCF over Earnings 3.5% 1.3% 1.5% 1.2% 1.2% 1.1%

Market Ratios

EPS $0.51 $1.24 $1.44 $1.67 $1.85 $2.13


16

Appendix 9: Main competitors and price segments in which they operate

U.S. market share 12.4% 10.9% 20.9% 17.9%

High

Mid-high

Mid-low

Budget

Pri

ce R

an

ge

Source: Ferris estimates based on BIFMA, Knoll Investor Presentation 2009

Appendix 10:

25.88 $90.00 $92.00 $94.00 $96.00 $98.00 $100.00

7.3% $23.42 $23.90 $24.38 $24.86 $25.34 $25.83

7.2% $23.76 $24.24 $24.73 $25.22 $25.71 $26.20

7.1% $24.10 $24.60 $25.09 $25.59 $26.08 $26.58

7.0% $24.46 $24.96 $25.47 $25.97 $26.47 $26.98

6.9% $24.83 $25.34 $25.85 $26.36 $26.87 $27.39

6.8% $25.21 $25.73 $26.25 $26.77 $27.29 $27.81

6.7% $25.60 $26.13 $26.66 $27.19 $27.72 $28.25

DCF sensitivity analysis (WACC , Terminal FCF)

Disclosures:

Ownership and material conflicts of interest:

The author(s), or a member of their household, of this report [holds/does not hold] a financial interest in the securities of this company. The author(s), or a member of their household, of this report [knows/does not know] of the existence of any conflicts of interest that might bias the content or

publication of this report. [The conflict of interest is…]

Receipt of compensation:

Compensation of the author(s) of this report is not based on investment banking revenue.

Position as a officer or director:

The author(s), or a member of their household, does [not] serves as an officer, director or advisory board member of the subject company.

Market making:

The author(s) does [not] act as a market maker in the subject company’s securities.

Ratings guide:

Banks rate companies as either a BUY, HOLD or SELL. A BUY rating is given when the security is expected to deliver absolute returns of 15% or greater

over the next twelve month period, and recommends that investors take a position above the security’s weight in the S&P 500, or any other relevant index.

A SELL rating is given when the security is expected to deliver negative returns over the next twelve months, while a HOLD rating implies flat returns over the next twelve months.

Disclaimer:

The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used

as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of

an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with [Society Name], CFA

Institute or the CFA Institute Research Challenge with regard to this company’s stock.

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