Look Around and create a better world for the future. HermanMiller Annual Report 2014
Look Around
and create a better world for the future. Annual Report 2014 Herman Miller
Who is Herman Miller? Chapter 1: Introduction 06
10 Things About Herman Miller, Inc.
10
Mission and Value
12
History and Innovation
Herman Miller Herman Miller Financial review Cares Chapter 2: Analysis & Evaluation
Chapter 3: Corporation Culture
16
Properties
40
What we care about?
18
Risk Factors
44
Collective Health & Well-being
24
Review of Operations
46
Environmental Protections
26
Management’s Discussion and Analysis
4
Herman Miller / Annual Report 2014
New goals, new organization, collective future: A message from CEO Brian Walker Our world seems to be ever more integrated—geographically, culturally, and economically. Since the 1980s when we were one of only a few companies to explore environmental programs, we have come to believe that only through collective action can we truly make a difference. Nothing exists—or can be done—in a vacuum. No organization can exist very long without a larger purpose. We have learned those lessons over the past 100 years. Working toward a better world has been a goal here for almost 100 years. We put together this report every year to let you know how we’re doing in our four dimensions of moving toward a better world—community service, inclusiveness and diversity, health and well-being, and environmental performance. This past year, we reorganized our contributions of time, talent, and financial support into an employee-led, grass roots program called Herman Miller Cares. We hope to involve even more members of our community in directing community service to five areas: Design, Arts, and Culture; Education; Health; Essential Human Needs; and the Environment. Do we always hit the bull’s-eye? No, of course we don’t. Building a better world is not so much achieving a goal as an everyday fact of life.
Marshalling the global Herman Miller community—including our suppliers and creative network—behind our goals has led to some notable achievements over the past year. We were named for a tenth consecutive time to the Dow Jones Sustainability Index, and for a seventh consecutive time we achieved a perfect score on the Human Rights Campaign Foundation’s Corporate Equality Index. We received a Best and Brightest in Wellness Award and were named one of five of Michigan’s Healthiest Employers. My team and I promise to work toward the goals laid out in this report and build on the remarkable achievements made by so many people at Herman Miller over the past decades. I truly hope that this report will give you some ideas about how you can join us.
Thanks, Brian Walker, CEO, Herman Miller, Inc.
We renewed our commitment to environmental advocacy by focusing our goals in a program called Earthright, which will extend our environmental work to the entire Herman Miller community. We group our goals into three areas: resource smart, eco-inspired design, and community-driven participation. To be a leader requires us to change, and the changes to our environmental goals and programs will give us something ambitious to shoot for and a way of hitting our targets.
Herman Miller / Look Around 2014
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4
Herman Miller / Annual Report 2014
Who is Herman Miller? Chapter 1:
Introduction 06
10 Things About Herman Miller, Inc.
10
Mission and Value
12
History and Innovation
Herman Miller / Look Around 2014
5
10 Things About Herman Miller, Inc.
1905 Star Furniture Co. in Zeeland, Michigan.
1923 In 1923, renamed it the Herman Miller Furniture Company.
1960 It became Herman Miller, Inc. in 1960.
When it comes to design, The real questions are: Does it solve a problem? Is it serviceable? How is it going to look in ten years?
6
Who is Herman Miller?
1. Over 100-year-old History Herman Miller is a 100-year-old-plus company that places great importance on design, the environment, community service, and the health and well-being of our customers and our employees. Innovative ways to improve the performance of our customers’ organizations have become our hallmark. Our award-winning furniture and related services and technologies are available through dealers and retailers around the world. Whether your world is an office, a school, a home, or a hospital—and whether you are a customer, an employee, a shareholder, or a member of our community—we work hard to create a better world around you. We became a public company in 1970. Net sales in fiscal year 2012 were more than $1.7 billion. Herman Miller trades on the NASDAQ Global Select Market under the symbol MLHR. 2. Focusing on sustainability Herman Miller has engaged in a number of initiatives to promote sustainability, and many of them have had cost-saving implications for the company. The company has developed a technique of mixing sawdust with chicken manure to produce topsoil. The company also uses a database
to track every chemical in each product used by the company, in order to eliminate harmful chemicals from their products. Management of the company has expressed concerns about global warming, and the company was using 27% renewable energy as of 2007. The company also issues a sustainability report. 3. Goal of “Perfect Vision” Herman Miller’s driving sustainability initiatives is its “Perfect Vision” goal. This is a broad initiative that sets significant targets for the year 2020. These targets include zero landfill, zero hazardous waste generation, zero air emissions (VOC), zero process water use, 100 percent green electrical energy use, company buildings constructed to a minimum LEED Silver certification, and 100 percent of sales from DfE-approved products. 4. Believe in and produce their product as eco-design. Many of Herman Miller’s products are designed to be ecologically sound, and many are good examples of eco-design techniques for achieving sustainability include saving materials, energy efficient manufacturing, recycled content, and recyclable content, including design for disassembly. The design process also utilizes life cycle assessment.
5. Most Admired Companies with Good Revenue Herman Miller is consistently recognized as one of Fortune Magazine’s “Most Admired Companies”, having placed at the top of the list for Furniture companies for the past 18 consecutive years. Sales of $262,000 in 1923 grew to $25 million in 1970, the year the company issued public stock; fiscal year 2012 revenue totaled more than $1.7 billion. 6. Green Design Principles Herman Miller helped fund the start of the United States Green Building Council, and hired architect William McDonough+Partners to design a factory incorporating green design principles. The building is known as the Greenhouse and is an example of green building. The building won the following awards: 1. AIA Committee on the Environment Top Ten Environmental Buildings, 1997 2. Business Week/Architectural Record Good Design Is Good Business Award, 1997 3. AIA Central Virginia Honor Award, 1998 4. International Development Research Council, Award for Distinguished Service in Environmental Planning, 1995
Herman Miller / Look Around 2014
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Eventually everything connects—people, ideas, objects. The quality of the connections is the key to quality per se. —Charles Eames
7. Good Culture Herman Miller’s culture results from the collective attitudes, aspirations, ideals, and experiences of the people who work here. We believe that each person at Herman Miller has potential and multiple talents. We also believe that the way we experience Herman Miller as employees is important to our ability to perform at the highest levels—for our customers, our shareholders, and our neighbors. 8. Creating a better world When we think about building a better world around you, we organize our work into four areas: • Community Service • Inclusiveness & Diversity • Health & Well-Being • Environmental Advocacy
9. Community Service We take community service seriously. Our employees seek out volunteer opportunities in the community, and we allow each of them 16 paid hours a year to work with the charitable organizations of their choice. Herman Miller people regularly take part in initiatives ranging from highway and river cleanups to youth mentoring programs. Herman Miller sets goals for the number of employee volunteer hours we contribute annually to our communities. In May 2013, we recorded a three-year total of 49,577 volunteer hours on the parts of all Herman Miller employees, surpassing our goal of 45,000. We report our progress in meeting these goals to the CEO. 49,577 hr
In working in these areas, it boils down to building community—with you and around you, in your work space and in your neighborhood, among family and among colleagues, in our backyard and around the world. Read on to see how we’ve done in the ongoing process of meeting our goals.
45,000 hr
May, 2013
8
Who is Herman Miller?
Our Goal
three-year total of 49,577 volunteer hours on the parts of all Herman Miller employees.
10. Great Design Thinking For over 75 years, we have worked with some of the most outstanding designers in the world—Gilbert Rohde, George Nelson, Charles and Ray Eames, Alexander Girard, Isamu Noguchi, Robert Propst, Bill Stumpf, Studio 7.5, and Yves Béhar. They have taught us a habit of mind that begins with a problem, researches possibilities, and produces a durable and beautiful solution. That is our view of design. This way of thinking about design has led us to be innovative in many parts of our business. Our environmental advocacy continues to lead our industry. Our graphics and communications are distinctive and award-winning. The Herman Miller performance system, modeled on the Toyota Production System, innovates every day and delivers our products dependably around the world. We also innovate in our human resource programs to make the employee experience at Herman Miller fulfilling and productive. Above all, our design thinking has led us to help people do great things, a goal that requires not only sustainable business practices, but community service, health and well-being, safety, and inclusiveness and diversity.
CREATIVE AND COLLECTIVE CULTURE Photos of this page are the best known creative group in Herman Miller, Studio 7.5, as the good example for collective creative culture. The group’s name—Studio 7.5—comes from an early idea to rent a 7.5-ton truck, put a model shop in it, and drive from one project site to another. Obviously, freedom of movement is important for these designers. They move freely—and smartly—when designing products for their clients. The complexity of design problems, Studio 7.5 believes, requires collaboration, and repeated testing of ideas in full-scale models until the most elegant answer emerges. Studio 7.5 says of their designs, “Both Metaform Portfolio and Mirra 2 empower people by giving them more control over their environment and tools. Our goal is to enable people to assume roles similar to that of a craftsman in his shop, surrounded by what he needs to be most productive.”
Herman Miller / Look Around 2014
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Mission and Values We set a good long-turn vision because it’s a chain reaction, each subject leads to the next.
We want to create a better world The products and services of Herman Miller and its subsidiary companies are purposefully designed to improve the human experience in built environments. The company emphasizes a problem-solving approach, creating inspiring designs that help people do great things and organizations to perform at their best. Herman Miller’s motivation is drawn from its tradition and cultural passion for creating a better world. This means the company works for the health and well-being of its customers and employees, the environment, local communities, and through an inclusive Herman Miller ethos. It also means the company works hard to give shareholders—including company employees— a fair return. Focusing on customers’ present and future needs, the company studies working, healing, learning and living environments to design and deliver products and services that make the built environment work better. That goal is consistent with the values that define the company and how it functions. At Herman Miller, the ’Things That Matter’ most are Curiosity and Exploration, Design, Performance, E n ga ge m e n t , I n c l u s i ve n e s s , Re l at i o n s h i p s , Transparency, Foundations, and a Better World.
10
Who is Herman Miller?
Herman Miller’s focus on performance innovation in design, manufacturing, information technology, human resource programs, and environmental practices have established it as an admired global company. A past recipient of the Smithsonian Institution’s Cooper-Hewitt “National Design Award,” in 2012 Herman Miller again received the Human Rights Campaign Foundation’s top rating in its annual Corporate Equality Index, was again named among the US 50 Best Manufacturers by Industry Week and the Dow Jones Sustainability World Index. The company was also inducted into the Made in the USA Foundation’s Hall of Fame. Dozens of Herman Miller designs reside in the permanent collections of major museums, including the New York Museum of Modern Art, the Henry Ford Museum, and the Smithsonian Institution, as well as other significant museum design collections around the world. Design with a future vision for the human life At Herman Miller we believe the future quality of human life is dependent on both economic vitality and a healthy, sustainable natural environment. We do not see these goals as mutually exclusive, but inextricably linked. Mankind’s future depends on meeting the needs and aspirations of a growing global population, while enhancing and protecting the ecosystem on which all life depends.
In 2004, we put into place a set of environmental goals that included a zero operational footprint and 100 percent renewable electrical energy. Ten years later, we had largely achieved these goals, having reduced our footprint by 91 percent, and using 100 percent of our electrical energy from renewable resources for over three years. Given the progress toward these goals, we believed it was time to expand our efforts in advocating for the environment. Our new 10-year sustainability strategy, Earth-right, begins with three principles: positive transparency, products as living things, and becoming greener together. We have sharpened our goals around the smart use of resources, eco-inspired design, and becoming community driven. Most importantly, we are finding new ways to involve more employees, suppliers, and customers.
0 waste
50%
more local renewables (50,000 mwh)
125,000 tons of product taken back per year
100%
50% reduction in energy intensity
100% Design for the Environment approved products
level 3 certified products
50% less water use (30M gallons)
Our commitment is to achieve these goals by 2023. Herman Miller / Look Around 2014
11
History and Innovation
A business is rightly judged by its products and services, but it must also face scrutiny as to its humanity. —D.J. De Pree, founder, Herman Miller, Inc. Herman Miller was a West Michigan businessman who helped his son-in-law, D.J. De Pree, buy the Michigan Star Furniture Company in 1923. De Pree had been working at the company, which opened in 1905, since he was hired in 1909 as a clerk. De Pree knew his father-in-law was a man of integrity, so he decided to rename the company after him. By the middle of the 20th century, the name Herman Miller had become synonymous with “modern” furniture. Working with legendary designers George Nelson and Charles and Ray Eames, the company produced pieces that would become classics of industrial design. Since then, we’ve collaborated with some of the most outstanding designers in the world, including Alexander Girard, Isamu Noguchi, Robert Propst, Bill Stumpf, Don Chadwick, Ayse Birsel, Studio 7.5, Yves Béhar, Doug Ball, and many talented others. Today, in addition to our classic pieces and new designs for the home, Herman Miller is a recognized innovator in contemporary interior furnishings, solutions for healthcare environments, and related
12
Who is Herman Miller?
technologies and services. A publicly held company headquartered in Zeeland, Michigan, we have manufacturing facilities in the United States, China, Italy, and the United Kingdom and sales offices, dealers, licensees, and customers in over 100 countries. We operate through several focused businesses, brands, and distribution channels, including Herman Miller, Herman Miller Healthcare, Nemschoff, Geiger International, and independently owned dealerships. All of them work to design and build a better world around you.
LEFT George Nelson, one of the most important designer in Herman Miller's history. RIGHT The Herman Miller’s founder and designers. From left to right: Robert Propst, Alexander Girard, George Nelson, DJ De Pree, Ray Eames, and Charles Eames.
Herman Miller / Look Around 2014
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Herman Miller Financal review Chapter 2:
Analysis & Evaluation 16
Properties
18
Risk Factors
24
Review of Operations
26
Management’s Discussion and Analysis
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 31, 2014 were as follows: 917,400
750,800
582,700
224,019
207,700
93,000
85,000
Owned Properties Holland, Michigan
Spring Lake, Michigan
Zeeland, Michigan
Dongguan, China
Sheboygan, Wisconsin
Hildebran, N. Carolina
Bath, United Kindom
(Square Footage)
176,700
100,800
94,700
104,402
92,000
Leased properties Atlanta,
Chippenham,
Ningbo,
Hong Kong,
Yaphank,
Georgia
UK
China
China
New York
(Square Footage)
Corporation Properties Herman Miller / Look Around 2014
17
Risk Factors The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones we face; others, either unforeseen or currently deemed less significant, may also have a negative impact on our company. If any of the following actually occurs, our business, operating results, cash flows, and financial condition could be materially adversely affected.
1. Sustained downturn in the economy could adversely impact our access to capital. The recent disruptions in the global economic and the markets adversely impacted the broader financial and credit markets, at times reducing the availability of debt and equity capital for the market as a whole. Conditions such as these could re-emerge in the future. Accordingly, our ability to access the capital markets could be restricted at a time when we would like, or need, to access those markets, which could have an impact on our flexibility to react to changing economic and business conditions.
18
Herman Miller Financial Review
The resulting lack of available credit, increased volatility in the financial markets and reduced business activity could materially and adversely affect our business, financial condition, results of operations, our ability to take advantage of market opportunities and our ability to obtain and manage our liquidity. In addition, the cost of debt financing and the proceeds of equity financing may be materially and adversely impacted by these market conditions. The extent of any impact would depend on several factors, including our operating cash flows, the duration of tight credit conditions and volatile equity markets, our credit capacity, the cost of financing, and other general economic and business conditions. Our credit agreements contain performance covenants, such as a limit on the ratio of debt to earnings before interest, taxes, depreciation and amortization, and limits on subsidiary debt and incurrence of liens. Although we believe none of these covenants are presently restrictive to our operations, our ability to meet the financial covenants can be affected by events beyond our control. 2. We may not be successful in implementing and managing our growth strategy. We have established a growth strategy for the business based on a changing and evolving world. Through this strategy we are positioning the company to take advantage of existing markets, explore growth opportunities in new markets with supportive demographics, increase demand by addressing unmet needs, and expanding into areas that yield higher prospects for margins and profitability.
We ultimately aspire to create a lifestyle brand, and we intend to grow in certain targeted ways. First, we will invest in areas that increase our addressable markets across focused customer segments (such as healthcare, education, small and medium business, and consumer). Second, we will expand into emerging geographic markets that offer growth potential based upon their supportive demographics. Third, we will continue to invest in innovative products, which has been a hallmark of our success for many years. And finally, we will grow through targeted acquisitions. While we have confidence that our strategic plan reflects opportunities that are appropriate and achievable and that we have anticipated and will manage the associated risks, there is the possibility that the strategy may not deliver the projected results due to inadequate execution, incorrect assumptions, sub-optimal resource allocation, or changing customer requirements. There is no assurance that our current product and service offering will allow us to meet these goals. Accordingly, we believe we will be required to continually invest in the research, design, and development of new products and services. There is no assurance that such investments will have commercially successful results. Certain growth opportunities may require us to invest in acquisitions, alliances, and the startup of new business ventures. These investments may not perform according to plan and may involve the assumption of business, operational, or other risks that are new to our business.
our ability to compete for business. It may also put the availability and/or value of our capital investments within these regions at risk. These expansion efforts expose us to operating environments with complex, changing, and in some cases, inconsistently applied legal and regulatory requirements. Developing knowledge and understanding of these requirements poses a significant challenge, and failure to remain compliant with them could limit our ability to continue doing business in these locations. Pursuing our strategic plan in new and adjacent markets, as well as within developing economies, will require us to find effective new channels of distribution. There is no assurance that we can develop or otherwise identify these channels of distribution. 3. The markets in which we operate are highly competitive, and we may not be successful in winning new business. We are one of several companies competing for new business within the furniture industry. Many of our competitors offer similar categories of products, including office seating, systems and freestanding office furniture, case goods, storage, and residential and healthcare furniture solutions. We believe that our innovative product design, functionality, quality, depth of knowledge, and strong network of distribution partners differentiates us in the marketplace. However, increased market pricing pressure could make it difficult for us to win new business with certain customers and within certain market segments at acceptable profit margins.
Future efforts to expand our business within developing economies, particularly within China and India, may expose us to the effects of political and economic instability. Such instability may impact
Herman Miller / Look Around 2014
19
We have significant manufacturing and sales operations in the United Kingdom, which represents our largest marketplace outside the United States. 4. Adverse economic and industry conditions could have a negative impact on our business, results of operations, and financial condition. Customer demand within the contract office furniture industry is affected by macro-economic factors; general corporate profitability, white-collar employment levels, new office construction rates, and existing office vacancy rates are among the most influential factors. History has shown that declines in these measures can have an adverse effect on overall office furniture demand. Additionally, factors and changes specific to our industry, such as developments in technology, governmental standards and regulations, and health and safety issues can influence demand. There are current and future economic and industry conditions, which could adversely affect our business, operating results, or financial condition. Other macroeconomic developments, such as the recent recessions in Europe, the debt crisis in certain countries in the European Union, and the economic slow down in Asia could negatively affect the company’s ability to conduct business in those geographies. The continuing debt crisis in certain European countries could cause the value of the Euro to deteriorate, reducing the purchasing power of the company’s European customers and potentially undermine the financial health of the company’s suppliers and customers in other parts
20
Herman Miller Financial Review
of the world. Financial difficulties experienced by the company’s suppliers and customers, including distributors, could result in product delays and inventory issues; risks to accounts receivable could result in delays in collection and greater bad debt expense.
• Political, social, and economic conditions
5. Our business presence outside the US exposes us to certain risks that could negatively affect our results of operations and financial condition. We have significant manufacturing and sales operations in the United Kingdom, which represents our largest marketplace outside the United States. We also have manufacturing operations in China. Additionally, our products are sold internationally through wholly-owned subsidiaries or branches in various countries including Canada, Mexico, Brazil, France, Germany, Italy, Netherlands, Japan, Australia, Singapore, China, Hong Kong, and India. In certain other regions of the world, our products are offered primarily through independent dealerships.
• Labor and employment practices
Doing business internationally exposes us to certain risks, many of which are beyond our control and could potentially impact our ability to design, develop, manufacture, or sell products in certain countries. These factors could include, but would not necessarily be limited to:
• Cultural practices and norms • Legal and regulatory requirements • Security and health concerns • Protection of intellectual property
• Natural disasters
In some countries, the currencies in which we import and export products can differ. Fluctuations in the rate of exchange between these currencies could negatively impact our business. Additionally, tariff and import regulations, international tax policies and rates, and changes in U.S. and international monetary policies may have an adverse impact on results of operations and financial condition. 6. Disruptions in the supply of raw and component materials could adversely affect our manufacturing and assembly operations. We rely on outside suppliers to provide on-time shipments of the various raw materials and component parts used in our manufacturing and assembly processes. The timeliness of these deliveries is critical to our ability to meet customer demand. Any disruptions in this flow of delivery could have a negative impact on our business, results of operations, and financial condition.
Share Price, Earnings, and Dividends Summary Herman Miller, Inc., common stock is traded on the NASDAQ-Global Select Market System (Symbol: MLHR). As of July 24, 2014, there were approximately 20,000 record holders, including individual participants in security position listings, of the company’s common stock. YEAR ENDED MAY 31, 2014:
First quarter
MARKET PRICE
MARKET PRICE
MARKET PRICE
H I G H ( AT C L O S E )
L O W ( AT C L O S E )
CLOSE
EARNING(LOSS) PER SHARE-DILUTED(1)
29.13
25.47
25.47
0.38
DIVIDENDS DECLARED PER SHARE
1. The sum of the quarters may not equal the annual balance due to rounding associated with the calculation of earnings per share on an individual quarter basis
0.125
2. Dividends were declared and paid quarterly during fiscal 2014 and 2013 as approved by the Board of Directors.
Second quarter
31.91
25.56
31.91
(1.37)
0.125
Third quarter
30.95
26.46
28.18
0.33
0.140
Fourth quarter
32.43
27.83
31.27
0.28
0.140
idends is subject to the discretion of the Board depending on
Year
32.43
25.47
31.27
(0.37)
0.530
the company’s future results of operations, financial condi-
YEAR ENDED JUNE 1, 2013:
MARKET PRICE
MARKET PRICE
MARKET
EARNING(LOSS) PER
DIVIDENDS DECLARED
H I G H ( AT C L O S E )
L O W ( AT C L O S E )
PRICE CLOSE
SHARE-DILUTED
PER SHARE
First quarter
20.24
16.35
19.56
0.34
0.090
Second quarter
21.73
18.58
21.12
0.14
0.090
Third quarter
24.96
20.61
24.40
0.28
0.125
Fourth quarter
28.17
23.58
28.11
0.40
0.125
Year
28.17
16.35
28.11
1.16
0.430
While it is anticipated that the company will continue to pay quarterly cash dividends, the amount and timing of such div-
tion, capital requirements, and other relevant factors.
Herman Miller / Look Around 2014
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Stockholder Return Performance Graph 250
Utilization patterns should allow for future options, for growth and for change.
$232
$208 200 $178
150
$137 $132
100
2009
2010
2011
2012
2013
2014
NASD Non-Finabcial S&P 500 Index Herman Miller, Inc
2009
2010
2011
2012
2013
2014
Herman Miller, Inc
$100
$137
$178
$132
$208
$232
S&P 500 Index
$100
$119
$145
$139
$177
$209
NASD Non-Financial
$100
$128
$163
$164
$164
$203
Char t in left side is a line graph comparing the yearly percentage change in the cumulative total stockholder return on the company’s common stock with that of the cumulative total return of the Standard & Poor ’s 500 Stock Index and the NASD Non-Financial Index for the five-year period ended May 31, 2014. The graph assumes an investment of $100 on May 31, 2009 in the company’s common stock, the Standard & Poor’s 500 Stock Index and the NASD Non-Financial Index, with dividends reinvested.
22
Herman Miller Financial Review
7. Increases in the market prices of manufacturing materials may negatively affect our profitability. The costs of certain manufacturing materials used in our operations are sensitive to shifts in commodity market prices. In particular, the costs of steel, plastic, aluminum components, and particleboard are sensitive to the market prices of commodities such as raw steel, aluminum, crude oil, lumber, and resins. Increases in the market prices of these commodities may have an adverse impact on our profitability if we are unable to offset them with strategic sourcing, continuous improvement initiatives or increased prices to our customers. 8. Disruptions within our dealer network could adversely affect our business. Our ability to manage existing relationships within our network of independent dealers is crucial to our ongoing success. Although the loss of any single dealer would not have a material adverse effect on the overall business, our business within a given market could be negatively affected by disruptions in our dealer network caused by the termination of commercial working relationships, ownership transitions, or dealer financial difficulties. If dealers go out of business or restructure, we may suffer losses because they may not be able to pay for products already delivered to them. Also, dealers may experience financial difficulties, creating the
need for outside financial support, which may not be easily obtained. In the past, we have, on occasion, agreed to provide direct financial assistance through term loans, lines of credit, and/or loan guarantees to certain dealers. 9. Increasing competition for highly skilled and talented workers could adversely affect our business. The successful implementation of our business strategy depends, in part, on our ability to attract and retain a skilled workforce. The increasing competition for highly skilled and talented employees could result in higher compensation costs, difficulties in maintaining a capable workforce, and leadership succession planning challenges. 10. Costs related to product defects could adversely affect our profitability. We incur various expenses related to product defects, including product warranty costs, product recall and retrofit costs, and product liability costs. These expenses relative to product sales vary and could increase. We maintain reserves for product defect-related costs based on estimates and our knowledge of circumstances that indicate the need for such reserves. We cannot, however, be certain that these reserves will be adequate to cover actual product defect-related claims in the future. Any significant increase in the rate of our product defect expenses could have a material adverse effect on operations.
11. We are subject to risks associated with self-insurance related to health benefits. We are self-insured for our health benefits and maintain per employee stop loss coverage; however, we retain the insurable risk at an aggregate level. Therefore unforeseen or catastrophic losses in excess of our insured limits could have a material adverse effect on the company’s financial condition and operating results. See Note 1 of the Consolidated Financial Statements for information regarding the company’s retention level. 12. Government and other regulations could adversely affect our business. Government and other regulations apply to the sale of many of our products. Failure to comply with these regulations or failure to obtain approval of products from certifying agencies could adversely affect the sales of these products and have a material negative impact on operating results.
Herman Miller / Look Around 2014
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Review of Operations Operation report from 2005–2014
(In Millions, except key rations and per share data)
2014
2013
2012
2011
2010
$1,318.8
Operating Results $1,882.0
$1,774.9
$1,724.1
$1,649.2
Gross margin
Net Sales
631.0
605.2
590.6
538.1
428.5
Selling, general, and administrative (8)
590.8
430.4
400.3
369.0
334.4
5.9
59.9
52.7
45.8
40.5
Operating earnings(loss)
(25.7)
114.9
137.6
123.3
53.6
Earnings(Loss) before income taxes
(43.4)
97.2
119.5
102.5
34.8
Net earning(loss)
(22.1)
68.2
75.2
70.8
28.3
90.1
136.5
90.1
89.0
98.7
(48.2)
(209.7)
(58.4)
(31.4)
(77.6)
Design and research
Cash flow from operating activities Cash flow used in investing activities Depreciation and amortization
42.4
37.5
37.2
39.1
42.6
Capital expenditures
40.8
50.2
28.5
30.5
22.3
Common stock repurchased plus cash dividends paid
43.0
22.7
7.9
6.0
5.7
6.0%
2.9%
4.5%
25.1%
(19.1)%
Key Ratios Sales growth(Decline) Gross margin (1)
33.5
34.1
34.3
32.6
32.5
Selling, general, and administrative (1)(8)
31.4
24.3
23.2
22.4
25.4
Design and research (1)
I believe we should preserve evidence of the past, not as a pattern for sentimental imitation, but as nourishment for the creative spirit of the present.
Operating earnings (1)
Herman Miller Financial Review
3.4
3.1
2.8
3.1
6.5
8.0
7.5
4.1 (58.4)
Net earnings growth(Decline)
(132.4)
(9.3)
6.2
150.2
After-tax return on net sales (4)
(1.2)
3.8
4.4
4.3
2.1
After-tax return on average assets (5)
(2.3)
7.6
9.1
9.0
3.7
After-tax return on average equity (6)
(6.4)%
24.0%
33.2%
49.7%
64.2%
Share and per share Data $(0.37)
$1.16
$1.29
$1.06
$0.43
Cash dividends declared per share
Earnings (loss) per share-diluted
0.53
0.43
0.09
0.09
0.09
Book value per share ate year end
6.27
5.44
4.25
3.53
1.41
Market price per share at year end
31.27
28.11
17.87
24.56
19.23
59.0
58.8
57.7
57.5
57.7w
$990.9
$946.5
$839.1
$808.0
$770.6
145.7
109.3
201.6
205.9
182.9
1.3
1.4
1.8
1.8
1.3
Stockholders’ equity
372.1
319.5
248.3
205.0
80.1
Total Capital
622.1
569.5
498.3
455.0
381.3
Weighted average shares outstanding-diluted
Financial Condition Total assets Working Capital (3) Current ration (2)
24
3.5 (1.4)
(In Millions, except key rations and per share data)
2009
2008
2007
2006
2005
Operating Results $1630.0
$2,012.1
$1,918.9
$1,737.2
$1,515.6
Gross margin
Net Sales
527.7
698.7
645.9
574.8
489.8
Selling, general, and administrative (8)
359.2
400.9
395.8
371.7
327.7
45.7
51.2
52.0
54.4
40.2
122.8
246.6
198.1
157.7
121.9 112.8
Design and research Operating earnings(loss) Earnings(Loss) before income taxes
98.9
230.4
187.7
147.6
Net earning(loss)
68.0
152.3
120.1
99.2
68
Cash flow from operating activities
(29.5)
(51.0)
(37.4)
(47.6)
(40.1)
Cash flow used in investing activities
(16.5)
(86.5)
(131.5)
(151.5)
(106.6)
Depreciation and amortization
41.7
43.2
41.2
41.6
46.9
Capital expenditures
25.3
40.5
41.2
41.6
46.9
Common stock repurchased plus cash dividends paid
25.3
40.5
41.3
50.8
34.9
Key Ratios Sales growth(Decline)
(19.0)%
4.9%
10.5%
14.5%
13.2%
Gross margin (1)
32.4
34.7
33.7
33.1
32.3
Selling, general, and administrative (1)(8)
21.6
22.0
19.9
20.6
21.4
Design and research (1)
2.8
2.5
2.7
2.6
2.7
Operating earnings (1)
7.5
12.3
10.3
9.1
8.0 60.8
Net earnings growth(Decline)
(55.4)
18.0
30.1
45.9
After-tax return on net sales (4)
4.2
7.6
6.7
5.7
4.5
After-tax return on average assets (5)
8.8
21.0
19.4
14.4
4.5
After-tax return on average equity (6)
433.1%
170.5%
87.9%
64.2%
37.3%
1.
Share and per share Data Earnings (loss) per share-diluted Cash dividends declared per share
$1.25
$2.56
$1.98
$1.45
$0.96
0.29
0.35
0.33
0.31
0.29
Book value per share ate year end
0.15
0.42
2.47
2.10
2.45
Market price per share at year end
14.23
24.80
36.53
30.34
29.80
54.5
59.6
65.1
68.5
70.8
Weighted average shares outstanding-diluted
Shown as a percent of net sales.
2. Calculated using current assets divided by current liabilities. 3. Calculated using current assets less non-interest bearing current liabilities. 4. Calculated as net earnings (loss) divided by net sales. 5. Calculated as net earnings (loss) divided by average assets.
Financial Condition Total assets Working Capital (3)
6. Calculated as net earnings (loss) divided by
$767.3
$783.2
$666.2
$668.0
$707.8
243.7
182.7
103.2
93.8
162.3
Current ration (2)
1.6
1.6
1.4
1.3
1.5
Stockholders’ equity
8.0
23.4
155.3
138.4
170.5
385.4
398.9
331.5
317.2
364.5
Total Capital
average equity. 7. Calculated as interest-bearing debt plus stockholders’ equity. 8. Selling, general, and administrative expenses includes restructuring and impairment expenses in years that are applicable.
Herman Miller / Look Around 2014
25
Management’s Discussion and Analysis I think the major lesson I learned in my 21 years is: how to see. When you learn how to see, you learn to appreciate all that goes on around you—from the time you get up in the morning, to the time you go to bed at night. Executive Overview Herman Miller’s inspiring designs, inventive technologies and strategic services help people do great things and organizations to perform at their best. At present, most of our customers come to us for interior environments in corporate office and healthcare settings. We also have a growing presence in educational and consumer markets. Our primary products include furniture systems, seating, storage, freestanding furniture, healthcare environment products, case goods and textiles. More than 100 years of innovative business practices and a commitment to social responsibility have established Herman Miller as a recognized global company. A past recipient of the Smithsonian Institution’s Cooper-Hewitt National Design Award, Herman Miller designs can be found in the permanent collections of museums worldwide. In 2013, Herman Miller again received the Human Rights Campaign Foundation’s top rating in its annual Corporate Equality Index and was named among the 50 Best U.S. Manufacturers by Industry Week. Herman Miller is included in the Dow Jones Sustainability World Index. Herman Miller’s products are sold internationally through wholly-owned subsidiaries or branches in various countries including the United Kingdom, Canada, France, Germany, Italy, Japan, Mexico,
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Herman Miller Financial Review
Australia, Singapore, China, Hong Kong, India, and the Netherlands. The company’s products are offered elsewhere in the world primarily through independent dealerships or joint ventures with customers in over 100 countries. The company is globally positioned in terms of manufacturing operations. In the United States, the manufacturing operations are located in Michigan, Georgia, Wisconsin and North Carolina. In Europe, the manufacturing presence is located within the United Kingdom. The manufacturing operations in Asia include facilities located in Dongguan and Ningbo, China. The company manufactures products using a system of lean manufacturing techniques collectively referred to as the Herman Miller Performance System (HMPS). Herman Miller strives to maintain efficiencies and cost savings by minimizing the amount of inventory on hand. Accordingly, production is order-driven with direct materials and components purchased as needed to meet demand. The standard lead time for the majority of our products is 10 to 20 days. These factors result in a high rate of inventory turns and typically cause our inventory levels to appear relatively low compared to sales volume.
A key element of the company’s manufacturing strategy is to limit fixed production costs by sourcing component parts from strategic suppliers. This strategy has allowed the company to increase the variable nature of our cost structure while retaining proprietary control over those production processes that we believe provide us a competitive advantage. As a result of this strategy, our manufacturing operations are largely assembly-based. The business is comprised of various operating segments as defined by generally accepted accounting principles in the United States (U.S. GAAP). The operating segments are determined on the basis of how the company internally reports and evaluates financial information used to make operating decisions. For external reporting purposes, the company has identified the following reportable segments: North American Furniture Solutions—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. The North American Furniture Solutions reportable segment is the aggregation of two operating segments. In addition, the company has determined that both operating segments within the North American Furniture Solutions reportable segment represent reporting units.
ELA Furniture Solutions—During fiscal 2014, the company renamed its international reportable business segment ELA Furniture Solutions in order to better describe the geographic regions it serves, which include EMEA, Latin America, and Asia-Pacific. Prior to this name change, the company referred to this segment as “Non-North America.” ELA Furniture Solutions includes the operations associated with the design, manufacture, and sale of furniture products, primarily for work-related settings, in these aforementioned geographic regions Specialty and Consumer—Includes the operations associated with the design, manufacture, and sale of high-end furniture products and textiles including Geiger wood products, Maharam textiles, Herman Miller Collection products and the company’s North American consumer retail business. The company also reports a corporate category consisting primarily of unallocated corporate expenses including restructuring and impairment costs.
Herman Miller / Look Around 2014
27
The simple joy of taking an idea into one’s own hands and giving it proper form—that’s exciting. — George Nelson
Core Strengths The company relies on the following core strengths in delivering workplace solutions to customers. Brands—The Herman Miller brand is recognized by customers as a pioneer in design and sustainability, and as an advocate that supports their needs and interests. Within the industries the company operates, Herman Miller, Nemschoff, Geiger, Maharam, POSH, and Colbrook Bosson Saunders (CBS) are acknowledged as leading brands that inspire architects and designers to create their best design solutions. Leveraging the company’s brand equity across the lines of business to extend the company’s reach to customers and consumers is an important element of the company’s business strategy. Problem-Solving thinking and Innovation ideology—The company is committed to developing research-based functionality and aesthetically innovative new products and has a history of doing so, in collaboration with a global network of leading independent designers. The company believes its skills and experience in matching problem-solving design with the workplace needs of customers provides the company with a competitive advantage in the marketplace. An important component of the
28
Herman Miller Financial Review
company’s business strategy is to actively pursue a program of new product research, design, and development. The company accomplishes this through the use of an internal research and engineering staff, engaging with third party design resources generally compensated on a royalty basis. Operational Excellence—The company was among the first in our industry to embrace the concepts of lean manufacturing. HMPS provides the foundation for all of our manufacturing operations. The company is committed to continuously improving both product quality and production and operational efficiency. The company has extended this lean process work to its non-manufacturing processes as well as externally to our manufacturing supply chain and distribution channel. The company believes these concepts hold significant promise for further gains in reliability, quality and efficiency. Building and Leading Networks—The company values relationships in all areas of the business. The company considers its network of innovative designers, owned and independent dealers, and suppliers to be among the most important competitive factors and vital to the long-term success of the business.
Channels of Distribution The company’s products and services are offered to most of its customers under standard trade credit terms between 30 and 45 days and are sold through the following distribution channels. Independent Contract Furniture Dealers—Most of the company’s product sales are made to a network of independently owned and operated contract furniture dealerships doing business in many countries around the world. These dealers purchase the company’s products and distribute them to end customers. The company recognizes revenue on product sales through this channel once products are shipped and title passes to the dealer. Many of these dealers also offer furniture-related services, including product installation. Owned Contract Furniture Dealers—At May 31, 2014, the company owned 3 contract furniture dealerships, some of which have operations in multiple locations. The financial results of these owned dealers are included in our Consolidated Financial Statements. Product sales to these dealerships are eliminated as inter-company transactions from our consolidated financial results. The company recognizes revenue on these sales once products are shipped to the end customer and installation is substantially complete. The company believes independent ownership of contract furniture dealers is generally the
best model for a financially strong distribution network. With this in mind, the company’s strategy is to continue to pursue opportunities to transition the remaining owned dealerships to independent owners. Where possible, the goal is to involve local managers in these ownership transitions. Direct Customer Sales—The company also sells products and services directly to end customers without an intermediary (e.g. sales to the U.S. federal government). In most of these instances, the company contracts separately with a dealership or third-party installation company to provide sales-related services. The company recognizes revenue on these sales once products are shipped and installation is substantially complete. Independent Retailers—Certain products are sold to end customers through independent retail operations. Revenue is recognized on these sales once products are shipped and title passes to the independent retailer. E-Commerce—The company sells products through its online store, in which products are available for sale via the company’s website, hermanmiller.com. This site complements our existing methods of distribution and extends the company’s brand to new customers. The company recognizes revenue on these sales upon shipment of the product.
Challenges Ahead Like all businesses, the company is faced with a host of challenges and risks. The company believes its core strengths and values, which provide the foundation for its strategic direction, have us well prepared to respond to the inevitable challenges the company will face in the future. While the company is confident in its direction, the company acknowledges the risks specific to the business and industry. Future Avenues of Growth In spite of the risks and challenges it faces, the company believes it’s well positioned to successfully pursue its mission: Inspiring designs to help people do great things. To find opportunities for growth, at Herman Miller we’re always examining the ways in which the world is changing and evolving. This helps us better meet the needs of our customers and ultimately, to exceed their expectations. We have identified 3 areas of fundamental social and technological change that are informing our business strategy. Globalization & Demographics — Demographic shifts in the global workforce are significantly changing how and where value creation happens. Not only will the millennial generation overtake the majority representation of the workforce by 2015, but economies that once relied on industrial production are increasingly becoming driven by knowledge work.
Herman Miller / Look Around 2014
29
Inherently Global & Seamlessly Digital—The ubiquity of technology allows people to connect with other people, content, work, businesses, and ideas wherever and whenever they want. This means the way people work is changing, where people work is changing, and how people work and communicate with each other are also start to transform. The Era of Ideas—With the ongoing optimization of industrial production and information sharing, the demand for more innovative business solutions increases. The global focus of work is shifting to the successful generation and deployment of new ideas. As creativity and idea generation drive greater value-people, not process, provide the distinguishing capability. In this shift, workplaces are fundamentally changing from standardized and process-driven designs to diverse places that harness human capability, creativity, and relationships. We have developed a strategy to grow our business by shifting our focus in four fundamental ares in response to these changes. Through these shifts we are positioning the company to take advantage of existing markets, explore growth opportunities in new markets with supportive demographics, increase demand by addressing unmet needs, and expanding into areas that yield higher prospects for margins and profitability. The four fundamental shifts are described below:
30
Herman Miller Financial Review
From Product Centric to Solutions
From Office to Everywhere
From North America to Global
From Industry Brand to Comsumer Brand
1. From Product Centric to Solutions—The first strategic shift is to move from a product centric focus to one based upon delivering broader solutions to our customers. Herman Miller is retooling its core business to speak to customers with fresh insights, to spur new demand, and to change the game with unique solutions and services. 2. From North America Centric to Global—The second shift in our strategy aims to transform the business into a truly global organization. Herman Miller has a solid existing customer base, but we see fantastic opportunity in emerging markets with supportive demographics. We’re positioning ourselves to take maximum advantage of these shifts.
3. From The Office to Everywhere—We describe the third fundamental strategic shift as moving from the office to everywhere. Herman Miller envisions continued leadership and viability in the contract furniture industry, but also sees distinct targeted opportunities through focused market segmentation. We envision a total offering for customers to enable “a lifestyle of purpose.” 4. From Industry Brand to Industry + Consumer Brand—The fourth shift in our strategy involves our ambition to expand the connection of our powerful brand more directly with the consumers of our products. With a legacy of decades of design leadership, Herman Miller is a brand that people desire and want to know. We envision a business that harnesses our brand vision to pull consumers to us.
Good design, like good painting, cooking, architecture or whatever you like, is a manifestation of the capacity of the human spirit to transcend its limitations. — George Nelson We ultimately aspire to create a lifestyle brand, and we intend to grow in targeted ways. First, we will invest in areas that increase our addressable markets across focused customer segments (such as healthcare, education, small and medium business, and consumer). Second, we will expand into emerging geographic markets that offer growth potential based upon their supportive demographics. Third, we will continue to invest in innovative products, which has been a hallmark of our success for many years. And finally, we will grow through targeted acquisitions. Industry Analysis The Business and Institutional Furniture Manufacturer’s Association (BIFMA) is the trade association for the U.S. domestic office furniture industry. The company monitors the trade statistics reported by BIFMA and considers them an indicator of industry-wide sales and order performance. BIFMA publishes statistical data for the contract segment and the office supply segment within the U.S. furniture market. The U.S. contract segment relates primarily to large to mid-size corporations installed via a network of dealers. The office supply segment relates primarily to smaller customers via wholesalers and retailers. The company primarily participates, and is a leader in, the contract segment. The company’s diversification strategy lessens our dependence on the U.S. office furniture market.
The company also analyzes BIFMA statistical information as a benchmark comparison against the performance of the domestic U.S. business and also to that of competitors. The timing of large project-based business may affect comparisons to this data in any one period. Finally, BIFMA regularly provides its members with industry forecast information, which the company uses internally as one of several considerations in its short and long-range planning process. Looking forward, the general economic outlook for our industry in the U.S. is expected to be positive. BIFMA issued its most recent report in May 2014, which forecasts that the growth rate of office furniture orders in the U.S. will be 4.9 percent and 9.5 percent in calendar 2014 and 2015, respectively, while the growth rate of shipments will be 4.8 percent and 8.8 percent for calendar 2014 and 2015, respectively. This forecasted growth is based on an improvement in the U.S. economy, primarily driven by an improvement in employment and non-residential construction.
Herman Miller / Look Around 2014
31
Design is a plan for arranging elements in such a way as best to accomplish a particular purpose. Discussion of Business Conditions We finished fiscal 2014 with net sales of $1,882.0 million, which is an increase of 6.0 percent from fiscal 2013. The largest contributor to the growth in sales during the year was the recent acquisition of Maharam, which continues to prove its strategic value and operational excellence. Compared to the prior fiscal year, Maharam provided additional sales of approximately $96.5 million to our fiscal 2014 results. In addition to the integration and strong performance of Maharam, we made significant progress in a number of other important areas, including acquiring the manufacturing capabilities of POSHour Chinese affiliate, continuing to build momentum on our Living Office initiative, and completing our plan to reduce balance sheet volatility by restructuring our retirement plans. This year marked an important strategic step in expanding our international market coverage and fulfillment capability by completing the acquisition of a manufacturing and distribution operation in Dongguan, China. Going forward, this provides us with expanded operational capabilities and an established workforce of more than 850 employees to serve China and greater Asia. We also furthered our shift to solution-centered environments through the advancement of our Living Office initiative. At NeoCon, we displayed our Living Office, earning the International Interior Design Association’s award for best large showroom. We also contributed approximately $48.8 million in order to complete the termination of our domestic defined benefit pension plan, improving the health of our balance sheet and giving us greater control and visibility of retirement plan costs to make further strategic investments and return more cash to our shareholders. To that end,
32
Herman Miller Financial Review
we increased our quarterly shareholder dividend by 12% to $0.14 per share during the third quarter of fiscal 2014. This represented the third such action in the past two years, over which time we’ve raised the dividend payout by more than 500%. In spite of the increased spending related to the strategic initiative surrounding the pension termination, we delivered solid cash flows from operations of $90.1 million for fiscal 2014. The results for fiscal 2014 reflect restructuring and impairment charges of $26.5 million. Of this amount, $21.4 million related to the impairment of intangible asset values associated with our Nemschoff and POSH trade names. This partial write-down of asset carrying values was required based upon our assessment of forecasted sales and earnings performance for these businesses both of which continue to grow and contribute profits, though not to levels initially forecasted at their respective acquisition dates. It is important to note that the purchase consideration for both the POSH and Nemschoff acquisitions included forms of contingent consideration that decreased in value significantly, subsequent to their respective acquisition dates. This resulted in net purchase consideration that was markedly lower than the initial purchase accounting would have indicated for both POSH and Nemschoff. In short, the impairment expenses were largely offset by cumulative life-to-date reductions in the amounts potentially owed under the contingent consideration provisions.
Our North American Furniture Solutions segment continued to experience headwinds from reductions in U.S. federal government spending, as fiscal 2014 sales were lower than fiscal 2013 sales by approximately $12.0 million. However, U.S. federal government orders for the third and fourth quarters both showed year over year improvements, which was clearly a welcome sign to the business. ELA Furniture Solutions experienced mixed demand in its markets, with strong sales in Europe, particularly the United Kingdom (U.K.), as well as Latin America. This was partially offset by lagging sales in the Asia Pacific region. Overall, we are generally encouraged by the improving fundamentals in Europe and parts of Asia, as well as the opportunities that we are seeing in Mexico and greater Latin America. Our Specialty and Consumer segment posted solid sales growth this fiscal year, driven principally by Maharam. However, sales for the segment grew organically as well, through the continued growth of Herman Miller Collection and our consumer focused business, which sells through independent retail distributors and our own e-commerce platforms. The investments we’ve made in the continued development of our channels to market, including the investment in our online marketing and fulfillment capabilities, have been a primary factor in this growth.
As we head into fiscal year 2015, there are a number of encouraging signs within the macroeconomic environment of the business. In North America, we are encouraged by what continues to be a generally improving economic backdrop that is highlighted by healthy service sector employment levels, stabilizing U.S. federal government demand, positive trends in non-residential construction, and an improvement in the AIA Architecture Billings Index. Internationally the picture also appears to be improving, with more encouraging signals from the UK and Europe and greater stability in parts of Asia. Of course there are still areas of concern, particularly given the unfolding geopolitical events in the Ukraine and more recently the Middle East. In total, however, we appear to be in a period of improving industry dynamics and are optimistic about the overall direction and momentum of the business.
There are better ways to design than putting a big effort into making something look special. Special is generally less useful than normal, and less rewarding in the long term. — Jasper Morrison
Subsequent to the end of the fiscal year, we made a significant move in expanding our reach into the consumer market with the acquisition of Design Within Reach, Inc. The transaction closed on July 28, 2014 and additional information is available in Note 18 to the Consolidated Financial Statements.
Herman Miller / Look Around 2014
33
Operating Earnings (loss) to Adjusted Operating Earnings for The Years Indicated (Dollars in Millions)
Earnings (loss) Per Share-Diluted to Adjusted Earnings Per Share-Diluted for the Years Indicated
FISCAL YEAR ENDED MAY 31, 2014
JUNE 1, 2013
Operating earning (loss)
$(25.7)
$114.9
Percentage of net sales
(1.4)%
6.5%
$26.5
$1.2
$1.4
—
$164.4
$28.2
$(2.6)
—
$164.4
$144.3
8 .7 %
8 . 1%
Add: Restructuring and impairment expense Add: inventory step-up Add: legacy pension expenses (1) Less: POSH contingent consideration Adjusted operating earnings Percentage of net sales
(Dollars in Millions)
FISCAL YEAR ENDED MAY 31, 2014
JUNE 1, 2013
$(0.37)
$1.16
Add: Restructuring and impairment expense
$0.32
$0.01
Add: inventory step-up
$0.01
—
$1.76
$0.30
Earnings(loss) per share-diluted
Add: legacy pension expenses (1) Less: POSH contingent consideration Adjust earnings per share-diluted
$(0.04)
—
$1.68
$1.47
1. At the end of fiscal 2012, the company modified the asset allocations strategy of its U.S. defined benefit pension plans. This change was made in response to the decision to close and ultimately terminate these plans. Legac y pension expenses are included as an adjustment to Operating earnings (loss) and Earnings (loss) per share-diluted only in periods subsequent to this change in allocation.
Reconciliation of Non-GAAP Financial Measures This report contains Adjusted operating earnings measures and Adjusted earnings per share-diluted that are Non-GAAP financial measures. Adjusted operating earnings and Adjusted earnings per share-diluted are calculated by excluding from Operating earnings and Earnings per share-diluted items that we believe are not indicative of our ongoing operating performance. Such items consist of the following: • Expenses associated with restructuring actions taken to adjust our cost structure to the current business climate • Transition-related expenses, including amor tization and settlement expenses, relating to defined benefit pension plans that we have terminated • Increases in cost of sales related to the fair value step-up of inventories acquired • Non-cash impairment expenses • Changes in contingent consideration
34
Herman Miller Financial Review
We present Adjusted operating earnings and Adjusted earnings per share-diluted because we consider them to be important supplemental measures of our performance and believe them to be useful in analyzing ongoing results from operations. Adjusted operating earnings and Adjusted earnings per share-diluted are not measurements of our financial performance under GAAP and should not be considered an alternative to Operating earnings (loss) and Earnings (loss) per share-diluted under GAAP. Adjusted operating earnings and Adjusted earnings per share-diluted have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. In addition, in evaluating Adjusted operating earnings and Adjusted earnings per share-diluted, you should be aware that in the future we may incur expenses similar to the adjustments in this presentation. Our presentation of Adjusted operating
earnings and Adjusted earnings per share-diluted should not be construed as an indication that our future results will be unaffected by unusual or infrequent items. We compensate for these limitations by providing prominence of our GAAP results and using Adjusted operating earnings and Adjusted earnings per share-diluted only as a supplement. The following table reconciles Operating earnings (loss) to Adjusted operating earnings for the years indicated.
Financial Result The following is a comparison of our annual results of operations and year-overyear percentage changes for the periods indicated. (Dollars in Millions)
FISCAL 2014
%CHANGE
FISCAL 2013
FROM 2013 52 WEEKS
% CHANGE
FISCAL 2012
FROM 2012 52 WEEKS
53 WEEKS
Net sales
$1,882.0
6.0%
$1,774.9
2.9%
$1.724.1
Cost of sales
$1,251.0
7.0%
$1,169.7
3.2%
$1,133.5
Gross margin
$631.0
4.3%
$605.2
2.5%
$590.6
Operating expenses
$656.7
33.9%
$490.3
8.2%
$453.0
Operating earnings (loss)
$(25.7)
(122.4)%
$114.9
(16.5)%
$137.6
$17.7
—%
$17.7
(2.2)%
$18.1
$(43.4)
(144.7)%
$97.2
(18.7)%
$119.5
$0.1
200.0%
$(0.1)
—%
—
$(22.1)
(132.4)%
$68.2
(9.3)%
$75.2
Net other expenses(Benefit) Earning (loss) before income taxes Income tax expense (loss) from non-consolidated affiliates, net of tax Net earnings(loss)
Herman Miller / Look Around 2014
35
The company’s Consolidated Statements of Comprehensive Income in Percentage FISCAL 2014
Net sales Cost of sales
FISCAL 2013
FISCAL 2012
100%
100%
100%
66.5%
65.9%
65.7%
Gross margin
33.5%
34.1%
34.3%
Selling, general and administrative expenses
30.0%
24.2%
22.9%
Restructuring and impairment expenses
1.4%
0.1%
0.3%
Design and research expenses
3.5%
3.4%
3.1%
Total operating expenses
34.9%
27.6%
26.3%
Operating earnings (loss)
(1.4)%
6.5%
8.0%
Net other expenses
(0.9)%
1.0%
1.0%
Earnings (loss) before income taxes
(2.3)%
5.5%
6.9%
Income tax expense(benefit)
(1.1)%
1.6%
2.6%
Net earnings(loss)
(1.2)%
3.8%
4.4%
Gross Margin Compare to Cost of Sales in Percentage
33.5%
34.1%
34.3%
34.9%
34.9%
Gross Margin
Gross Margin
Gross Margin
2 01 4
2 01 3
2 01 2
Total Operating Expenses and Ratio in Percentage of Net Sales 30.0
24.2
22.9
Selling, general ,and administrative expenses Design and researchexpenses Restructurning and impairment expenses
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Herman Miller Financial Review
3.4
3.1
0.1
0.1
3.5
1.4
34.9%
27.6%
26.3%
Net Sales, Orders, and Backlog-Fiscal 2014 Compared to Fiscal 2013 For the fiscal year ended May 31, 2014, consolidated net sales increased $107.1 million to $1,882.0 million from $1,774.9 million for the fiscal year ended June 1, 2013. The acquisition of Maharam Fabric Corporation (Maharam) increased net sales by approximately $96.5 million versus the prior fiscal year. The impact of dealer divestitures throughout fiscal 2014 had the effect of reducing sales approximately $25.6 million compared to fiscal 2013. The overall impact of foreign currency changes for the fiscal year was to decrease net sales by approximately $8.9 million. The company has also experienced a $12 million decrease in sales volumes to the U.S. federal government as compared to fiscal 2013. The impact of net changes in pricing is estimated to have had a $10.5 million increase on net sales during fiscal 2014. The remaining increase compared to fiscal 2013 was driven by increased volumes. The increase in volumes was not driven by any single factor, but rather, was due mainly to an improvement in general economic factors, primarily in the North America and ELA business segments. Consolidated net trade orders for fiscal 2014 totaled $1,917.7 million compared to $1,771.6 million in fiscal 2013, an increase of 8.2 percent. Order rates began the year at a steady pace with orders averaging approximately $36 million per week for the first quarter and $39 million per week for the second quarter. For the third quarter, weekly order
rates decreased back down to average approximately $36 million per week, which is consistent with the company’s typical seasonal slowdown. The fourth quarter finished the year with average weekly order rates increasing to approximately $37 million. The weekly order pacing in the third quarter and the fourth quarter of fiscal 2014 was impacted by the price increase that was announced during the third quarter. This caused approximately $22 million of orders that otherwise would have been entered in the fourth quarter, to be entered in the third quarter. When adjusting for this impact, the weekly pacing of orders for the third quarter and fourth quarter was $34 million per week and $39 million per week, respectively. The overall impact of foreign currency changes for the fiscal year decreased net orders by approximately $9.6 million. Our backlog of unfilled orders at the end of fiscal 2014 totaled $306.4 million, a 11.7 percent increase from the $274.4 million of backlog at the end of fiscal 2013. BIFMA reported an estimated year-over-year increase in U.S. office furniture shipments of approximately 1.2 percent for the twelve-month period ended May 2014. By comparison, the net sales increased for the company’s domestic U.S. business by approximately
3.0 percent. The company believes that while comparisons to BIFMA are important, the company continues to pursue a strategy of revenue diversification that makes us less reliant on the drivers that impact BIFMA. Amendment and Restatement of Credit Facility On July 21, 2014, the company entered into an amendment and restatement of an existing unsecured credit facility. The Agreement, which expires on July 21, 2019, provides the company with up to $250 million in revolving variable interest borrowing capacity. In addition, the Agreement includes an “accordion feature” allowing the company to increase, at its option and subject to the approval of the participating banks, the aggregate borrowing capacity of the facility by up to $125 million. Amounts borrowed under the Agreement are subject to variable rates of interest tied to a base rate (either Prime, LIBOR or U.S. Federal Funds) depending on the form of borrowing selected by the company.
equal to approximately 83 percent, for $155 million in cash. An additional payment will be made to DWR public shareholders following their election to tender their shares in exchange for cash. The final cash purchase price will be subject to post-closing adjustments to be determined within 60 days of closing. As a result of the transaction, the Company estimates it will receive future tax benefits with a present value of approximately $10 million. The results of DWR will be included within a newly created “Consumer” reportable segment. This new segment will be comprised of DWR and the company’s existing North American consumer business. The company financed the acquisition of DWR using a combination of existing cash and $127 million of borrowings on its available unsecured credit facility. The amount borrowed is subject to an initial rate of interest equal to 3.25% per annum. Immediately following this acquisition, the unused borrowing capacity available to the company under the unsecured credit facility totaled $112.4 million.
Acquisition of Design Within Reach On July 28, 2014, the company acquired the majority of the outstanding equity of Design Within Reach, Inc. (“DWR”), a Stamford, Connecticut-based, leading North American marketer and seller of modern furniture, lighting and accessories primarily serving consumers and design trade professionals. The Company acquired an ownership interest in DWR
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Herman Miller / Annual Report 2014
Herman Miller Cares Chapter 3:
Future Perspective 40
What we care about?
44
Collective Health & Well-being
46
Environmental Protections
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What We Care About ? Choose your corner, pick away at it carefully, intensely and to the best of your ability and that way you might change the world.
We have belief We believed strongly that we have a debt to the communities we work in, live in, and serve in around the world. For decades we have made sizable contributions to nonprofits from Boys and Girls Clubs to Habitat for Humanity. This past year, we reorganized the contributions of our time, talent, and financial support into five areas: Design, Arts, and Culture; Education; Health; Essential Human Needs; and the Environment. We call this program Herman Miller Cares. Five employee-led “boards” research organizations needing our help and contributions. So far this year we have aligned ourselves with organizations from West Michigan and Mexico to Bangalore and Burundi.
Water Conservation and Reforestation The Environment Committee is partnering with organizations that are addressing the critical issues of water conservation and reforestation. Our regional partners will offer opportunities for Herman Miller employees to make a significant impact in their communities.
All City Canvas Struck with their goals of bringing art to the urban landscape and sparking creativity there, we supported All City Canvas in a project to paint murals on The Hub building in a gritty neighborhood of Mexico City. The artist, Augustine Kofie, holds workshops (facilitated by Herman Miller employees from our office there) to involve residents and local artists. Their grassroots approach inspires us all.
• Teach for the Watershed—providing watershed education to teachers and students in West Michigan through interactive, place-based education.
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• Outdoor Discover y Center— Mac atawa Gre enway— suppor ting proper t y restorations and ongoing environmental monitoring of two of the four most polluted tributaries in the Holland/Zeeland community. • Alliance for the Great Lakes—initiatives geared towards mproving the water quality of Detroit’s lakefront and supporting Adopt-a-BeachTM events in Sheboygan, WI, and Chicago, IL.
•
Sherwood Institute—restoring and protecting the lakes of Bangalore, India.
• Plant with Purpose—reforesting a zone within Burundi’s Lower Muyovozi River watershed that is home to an estimated 1,000 households and 6,445 individuals.
Cholera Clinic in Haiti Partnered with MASS Design from Boston, a team from Herman Miller researched, designed, and prototyped a bed and chair for cholera patients at the Cholera Treatment Center in Port-au-Prince, Haiti. Charity Softball In the summer of 2010, we held our first Charity Softball Tournament to benefit Gilda’s Club in Grand Rapids,a free cancer support community. In 2013, we added the Alzheimer’s Association of West Michigan as a recipient of contributions. This year, 14 teams raised over $15,000, bringing the grand total raised to over $50,000 in four years. Volunteer Hours in West Michigan Each year, Herman Miller gives each employee two days to spend supporting a non-profit organization. Three years ago, we set 45,000 hours as a goal. In 2013, we clocked in at 49,577 hours, zooming past the goal. Beneficiaries include: Outdoor Discovery
Center, Summit School-to-Career Transition Program, Habitat for Humanity, Boy Scouts of America, 4H Clubs, and Zeeland Public Schools. Assuming an average pay rate of $22 an hour, this effort translates into over $1,090,694 worth of time contributed. Bath Rugby Foundation Twenty Herman Miller employees in the U.K. contributed 150 hours to the Bath Rugby Foundation Inclusion Project during 2013, on top of a financial contribution. The volunteers helped specially trained Bath Rugby staff provide a safe environment where children with different needs can develop social awareness and confidence.
Helping Older People and Children in China Over 50 volunteers from Ningbo spent 160 hours helping older people at the Daqi Happiness Elder Home and the Luwan Special Needs Education School. The school was founded in 1986 with the concept of “Zero Rejection” and the idea that “Every human has the right to be educated.” The students include children ages one to 22 years old with medium to severe intellectual disabilities, infantile autism, and multi-disabilities. The school’s curriculum covers three-year preschool education, nine-year compulsory education, and three-year vocational education.
Advocacy in India Volunteers from the Herman Miller team in Bangalore, India, have partnered with the Association of People with Disability to improve nutrition and fitness of local school children. The APD is a 52-year-old organization providing therapeutic services, nutrition aids, education, advocacy, and livelihood training for people with disabilities.
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We value the whole person and everything each of us has to offer, obvious and not so obvious. When we are truly inclusive,I believe we go beyond toleration to really understanding what makes us unique and what unites us as human beings. — Brian Walker
Inclusiveness & Diversity Inclusiveness & Diversity (I&D) is much more than a social program at Herman Miller. Working to become an inclusive community is both the right thing to do and a business imperative that directly affects our ability to grow as a company. To effectively compete in the global marketplace, we recognize the need to attract and retain the best talent available. An inclusive environment allows our employees to be more innovative and create solutions that best meet the needs of our customers around the world. Herman Miller Academy As part of Herman Miller’s Next Generation Workforce Plan, the Herman Miller Academy Program began in January 2012. The Academy allows a group of students in West Michigan to see and experience several different career opportunities in manufacturing and gain skills to prepare them to join the workforce. The program runs each year in three semesters—spring, summer, and fall. We emphasize manufacturing and operations, but students also learn about other careers in the business world. More than 80 Herman Miller employees volunteer as presenters and mentors.
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Inclusiveness Resource Teams Herman Miller has always worked to become an inclusive community. It is both the right thing to do and a business imperative that directly affects our ability to grow as a global company. We know that we are only as diverse as our people, and our Inclusiveness Resource Teams (IRTS) strengthen our commitment to inclusion and champion people and programs. They are important in helping us create a workforce that mirrors the changing face of the world and better serves our customers. When our employees feel welcomed and valued, they engage and produce at a higher level, both in the workplace and the marketplace. Our IRTS implement initiatives that not only advance our employees and communities, but also help us meet business objectives. They have evolved from informal groups to more structured entities with broad participation. Eight IRTS organize our grassroots efforts in the United States: Asian; Black; disAbility Advocacy; Women Influencing Now; here (LGBT); Hispanic; Veterans; and Educate/Engage. Three additional IRTS (disAbility, Women Influencing Now, and Generational Outreach) organize our international efforts. In the past year, IRTS grew to over 300 members and participated in over 80 internal initiatives and community outreach activities.
We track these activities with the I&D scorecard, which measures our efforts in several critical areas including Whom We Sell To (Customers), Who Does the Work (Talent), Where We Work (Engagement), and Whom We Buy From (Supplier Diversity). Scorecard results are reviewed regularly by the company’s senior-level leadership and the Board of Directors. Helping Educate the Next Generation The Herman Miller Academy Class II began in January 2013 and expanded to include students from additional area schools. The Academy sparked community action resulting in the September 2013 launch of future PREP connections. This business-education partnership includes collaboration between the Ottawa Area
Intermediate School District, seven local districts, seven local companies, the West Coast Chamber of Commerce, and Lakeshore Advantage. The program supports students in grades six through 13. Programming is by grade level and will be introduced in phases over three school years. By the 2015/2016 school year, this program will be available throughout Ottawa County. The Herman Miller Academy sparked a community model of business-education partnership. Herman Miller Academy first year class results include: • All participants graduated from high school, with 16 out of 20 deciding to continue their education; one enlisted in the Marines and three entered the workforce. • Of the 16 pursuing post-secondary education, Herman Miller provided scholarships for and hired 6 of the students; we are sponsoring them in a local community college and manufacturing partnership program.
Award-winning Supplier Diversity Program Since 1990, our supplier diversity program has been central to our business, and we have always worked to build a strong and diverse supplier network. Supplier sourcing and qualification, Tier 2 reporting, mentoring, community and business outreach, and training and education are among the strategies we employ to strengthen these efforts. Our suppliers are true partners in sustainability and the creation of innovative, problem-solving products.
In 2013, we were named for the seventh time in nine years Corporation of the Year in the commercial products sector by the Michigan Minority Supplier Development Council (MMSDC). And on October 17, 2013 the MMSDC named Herman Miller a Corporate ONE Award winner for the tenth consecutive year. Causes, initiatives, and accomplishments this past year: • Recognized on the 2013 Working Mother 100 Best Companies List • Achieved 100 percent rating on our Corporate Equality Index from the Human Rights Campaign • Hosted 4th Chicago Showroom Pride Celebration • Initiated William C. Abney Academy Book Drive, Furniture Refresh, and Student Design Competition • Hosted renowned global activist at Herman Miller and was title sponsor of Hope College MLK celebration • Hosted Diversity Theatre and auction to benefit Grand Rapids Women’s Resource Center • Participated in International Stand Up to Bullying Day • Exhibited at the 2nd Annual Asian Professional Networking Event, co-sponsored by the West Michigan Asian American Association, Grand Rapids Kent County Convention/Arena Authority, and the Community Inclusion Group • Distributed care packages to Herman Miller family members serving in the military overseas • Sponsored and volunteered at Latin Americans United for Progress Youth Conference • Provided mobility assistance at annual Herman Miller employee picnic
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Collective Health & Well-being We believe the health and well-being of our community is a goal for all employees, is integral to our aspiration to create a better world, and is consistent with the way we value the potential of each and every person.
Health is what we focus on Every organization today struggles to provide healthcare benefits and wellness services to its employees. Herman Miller is no different. Two years ago, our CEO turned the problem over to 150 company leaders. Since then, as usual, collective action has led to some surprising results. Almost 2,000 employees and 300 spouses participated in our wellness challenges in 2013; and we’ve paid out more than $200,000 in rewards. The American Heart Association named us a Fit-Friendly Work site Platinum winner. Our per-employee healthcare costs in 2013 grew at only 1.5 percent, the smallest rate in five years. Overall, healthcare costs for fiscal 2013 are down 6.5 percent. Best of all? People with chronic problems are getting personalized help, our community is smarter about accessing healthcare at work, and we are healthier, eating better, and more active than ever. Healthy You! Wellness Program Herman Miller is committed to improving the health and wellness of all our employees. We are dedicated to engaging all employees and their families to become more aware of their health and more involved in improving their overall health habits. As a result of the efforts from many people at Herman Miller, we were named one of Michigan’s Best and Brightest in Wellness for 2013. We were also named Michigan’s Healthiest Employer for companies with more than 5,000 employees by
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Herman Miller Cares
Crain’s Detroit Business and MI Biz. Our Wellness Community continues to grow, and this year over 80 percent of employees obtained a health screening, “know their number,” and earned premium discounts. A variety of Healthy You! Challenges encourage behavioral change through social networking, team activities, and games; 40 percent of employees participated this year. We added additional fitness classes, such as Zumba, this year to accommodate the increased interest from employees and spouses. Also available are weight-loss programs, a diabetes management program, tobacco cessation resources, health and wellness coaches, and on-site clinics and relaxation rooms. Carpooling/Bike Pooling Programs in the U.S. Several programs help us reduce the amount of fuel we consume, thereby reducing the impact on our wallets as well as the environment. Employees can create either a carpool or bike pool profile including their address, work hours, and whether or not they are willing to drive or are just looking for a ride. Then they log their hours to be entered into a monthly drawing for a $50 gift certificate. Employees also receive one-time reimbursements including $500 when purchasing a hybrid or fuel-efficient car, $100 when purchasing a bike for personal use (or $25 for a bike tune-up), and $50 toward an approved helmet for use when riding a motorcycle or scooter.
As of this fiscal year, our fuel savings initiatives have resulted in these savings since the program began in 2008: • 553,817 miles saved by carpooling/biking • 239 fuel efficient vehicle reimbursements • 899 bicycle reimbursements • $218,332 reimbursed to employees
Safety From the production floor to the office workstation, from stacking products to adjusting seats ergonomically, we focus on safety in everything that we do. Our Corporate Safety Vision is that “Herman Miller will establish a culture where safety expectations are driven by all employees with the understanding that all injuries are preventable.” To achieve this vision, we have a program of consistent, verifiable, and ongoing identification and correction of problems and hazards. Our ongoing goals: • Zero injuries • Excellence in safety performance • Elimination of unsafe behavior
Achievements in Safety Many of our facilities are recognized by the Michigan Voluntary Protection Program. In addition to our participation in the Michigan OSHA Voluntary Protection Program, our Behavioral-Based Safety (BBS) program helps us work toward our goals. We launched a corporate-wide BBS program in 2006. This innovative workplace strategy reduced on-the-job injuries by 40 percent in the first year. The program relies on interactions and coaching between team members to reduce the kinds of accidents that we believe account for 94 percent of all injuries. Six manufacturing sites have implemented the BBS program. As part of BBS, we train our employees to observe on-the-job behaviors and give feedback. Making feedback a positive experience is critical; a feedback session will determine whether a behavior will be appreciated, supported, and sustained. We believe that getting more people involved in BBS is a key way to reach and maintain zero injuries.
Injury Incident Rate/100 Employees Herman Miller 2.1/100 employees
Industry Average 5.4/100 Employees
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Environmental Protections Was it possible that his furniture company was providing living environments of dubious value? Were consumers offered only interiors stuffed with over-scaled, over-elaborate, jaded furnishings? Earthright Ten years ago, we put into place a set of environmental goals that included a zero operational footprint. We have sharpened our goals around the smart use of resources, eco-inspired design, and becoming community driven. Our new 10-year sustainability strategy—Earthright—begins with three principles; positive transparency, products as living things, and becoming greener together. Most important, we are finding new ways to involve more employees and suppliers. Positively transparent: We will share an unprecedented amount of information about the impacts for which we are responsible. We will also share our point of view on human and environmental health and, more important, what we are doing about them to transform our business from a net consumer to a net producer. Living things: We will create better products and processes to protect everyone’s health and well-being, restore the ecosystem, and give back more than we extract. We will do this by applying regenerative design principles. We want to give back more than we take.
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Non-Hazardous Solid Waste Millions of Pounds
26.0
25.0
20.5
20.0
20.5
19.5 16.5
14.5
3.0
2.50 2.75
4.0
4.0 2.5 1.0
0.25
2010 Recycled Waste to Energy (On-site) Sent to Landfill Composted Waste to Energy (Off-site)
2011
2012
3.0
2.0
1.0
2013
3.5
Greener together: We cannot solve these problems by ourselves. We must engage our entire community including our employees, customers, suppliers, dealers, salespeople, and the remaining community.The three themes for our decisions and actions: resource smart, eco-inspired design, and community driven. Resource smart describes our goals for waste, water, and energy. • Waste: We will use better processes to eliminate all waste from our facilities. We have a zero waste goal, and we won’t stop until we get there.
We continuously ask ourselves if we have made the best choices in our products. Doing so gives us the confidence that we are building the most useful and beautiful products possible. Community driven means that we will engage our suppliers and continue to build on our history of employee engagement. This past year, we have launched Team 53 charged with empowering our employees to contribute creative ideas to inspire others to make Herman Miller a great place to work and to make this a better world.
• Water: Driving toward net zero water, we will manage our water well (using only what we need), looking to reduce and eliminate any unnecessar y water use. We will also return clean water to nature.
Our revised policy and goals are based upon—and driven by—the Earthright principles and themes. In the future we are going to achieve these goal, one by one, steps by steps.
• Energy: Our long-term energ y plan is to renewably power our facilities with a combination of on-site and local generation. We believe it is important to encourage the creation of renewable energy and to access it locally. Equally impor tant is ef ficient consumption. We will use only renewable forms of energy and will be as ef ficient as possible, removing any wasted forms of energy.
Resource Smart: Waste Our 10-year Earthright Commitment: Zero waste by fiscal 2023. We will work to eliminate all types of waste from our facilities. We will work towards zero discharge at all of our facilities, and we won’t stop until we get there.
Eco-inspired design means that we will design products to use materials with safe chemistry, include only recycled and/or bio-based materials, minimize life cycle impacts, and be part of a closed-loop recycling system. Design is important at Herman Miller.
This past year, we continued to reduce our overall operational footprint. We saw a one percent improvement over fiscal 2012, taking us to a 91.8 percent reduction from our 1994 baseline year. This improvement is due in large part to gains from reductions of air emissions and water usage. • Air emissions decreased by 13 tons from fiscal 2012. • Hazardous waste increased 11 tons. • Landfill decreased by 78 tons. • Process water use decreased by 4 million gallons. Shy of goal, this was a three percent improvement. • This year, as par t of Ear thright, the theme “Resource Smar t ” includes thre e par t s: Was te (including air emissions, hazardous waste, and solid waste to a landfill), Water and Energ y. Here are a couple of notable enhancements: • Water now includes total water consumption with a net zero goal. • Energy now is broken out into two parts: a) our energy intensity, measured as megawatt hours per one million dollars in sales and b) local renewables.
We have seven facilities that have achieved—and continue to maintain—zero landfill. These include the GreenHouse, the Design Yard, Marigold Lodge and the Midwest Distribution Center in Holland, Michigan; Hickory in Spring Lake, Michigan; Geiger International in Atlanta, Georgia; and Ningbo, China. Since we started tracking our waste footprint in 1994, we have reduced it over ninety percent.
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Resource Smart: Waste-Air Emissions Since 1994, Herman Miller has reduced air emissions by 87 percent. In 2013, we reduced air emissions by another 13 tons. Although just shy of meeting our goal, this was over a 4 percent improvement from last year. This improvement was partly due to the consolidation of operations within Nemschoff, our healthcare subsidiary that eliminated two finish lines. Resource Smart: Waste-Hazardous Waste Herman Miller has reduced hazardous waste by 90 percent from the 1994 baseline year. In 2013, we saw another increase of 11 tons, or three percent over the previous year. In last year’s report, we reported an increase of 5.8 tons due mainly to sodium bicarbonate used at our Energy Center (to counter hydrochloric acid found in the emissions). Testing done on this sodium bicarbonate identified unknown metals; the increased concentration of metals made this hazardous. Throughout this past year, we continued to look for—and successfully found—an alternative to eliminate the hazardous nature of the waste. So, this source of hazardous waste has been eliminated. All-in-all, the number of our facilities that release toxic chemicals, defined by the EPA’S Toxic Release Inventory, has been reduced from seven to one, and the number of toxic chemicals that we use in our facilities from twelve to two. Resource Smart: Waste-Solid Waste to Landfill Since 1994, we have reduced material sent to landfills by 97 percent from the 1994 baseline year. Although below goal, we reduced material sent to landfills by 78 tons, a one percent improvement, over last year. We continue to work on creative ways to eliminate all solid waste going to a landfill. This includes preventing pollution and reducing waste up front. We recycle as much as possible, resulting in recycling income of over $2 million.
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Although we send waste to waste-to-energy facilities, including our on-site Energy Center and off-site facilities, we look to reduce this amount by improving our recycling and reuse efforts. Again, our goal is to make sure that we are recycling everything possible. These efforts were encouraged by a total waste reduction competition among our sites. The winning site for fiscal 2013 was Nemschoff in Sheboygan, Wisconsin. In fiscal 2013, we stepped up our composting activities that now include the food wastes from our various sites’ kitchens and all of the paper towel waste from the washrooms. Last year, we composted over 4.3 million pounds. Last year, we continued to improve Nemschoff’s less mature zero landfill program. We also continued to work on the last few remaining items including the fly ash from our on-site Energy Center, burnoff ash from powder coat paint hooks, and vinyl (with a backing used for seam strength) that cannot be recycled due to its mixed composition. Last year, we has achieved energy savings over $650,000. Our most successful energy efficiency projects have focused on the continued updating of our factory lighting systems, adding variable frequency drives to motors, updating our building controls, and using local utility rebate programs to improve the efficiency of building and production systems. We continue to third-party verify our greenhouse gas emissions worldwide. Since 2007, we document our carbon footprint using the World Resources Institute and the World Business Council for Sustainable Development (WRI/WGBCSD) Greenhouse Gas Protocol: A Corporate Accounting and Reporting
We’ve reduced Waste-Air Emissions 87% since 1994.
We’ve reduced hazardous waste 90% since 1994.
We’ve reduced Waste-Solid Waste to Landfill 97% since 1994.
Standard (Revised Edition), The Climate Registry General Reporting Protocol (version 1.1, May 2008), and The Climate Registry General Reporting Protocol 1.1 Updates and Clarifications (31 January, 2012). We use emission factors provided by the Climate Registry’s General Reporting Protocol to calculate our Scope 1 direct greenhouse gas emissions under our control—our natural gas usage and local fleet emissions. Scope 2 indirect emissions are calculated from our purchased electricity. We have also included a limited amount of our Scope 3 (optional) indirect emissions from our product distribution process and our corporate business travel. We believe it is important to report a portion of our optional emissions because shipping goods to our customers is a big part of our business. We will continue to track and include optional emissions from product delivery miles and business travel (Scope 3).
Overall operational CO2 footprint of Herman Miller. Inc. 2010
2011
2012
METRIC TONS*
METRIC TONS*
METRIC TONS*
Total Scope 1 Emissions •
21,799
19,279
16,879
Stationary Combustion OWNED AND LEASED
17,262
15,812
13,672
Local Fleet NORTH AMERICA
2,739
2,762
2,519
Company Vehicles
1,119
319
390
679
386
298
Total Scope 2 Emissions •
60,260
62,049
59,914
*
Purchased Electricity OWNED AND LEASED-NORTH AMERICA
58,183
59,915
56,889
** Wood waste at Energy Center and biodiesel
Purchased Electricity Emissions OUTSIDE NORTH AMERICA
2,077
2,134
3,025
Combustion Emissions OUTSIDE NORTH AMERICA
Renewable Energy Certificates
59,154
58,558
56,889
Total Scope 3 Emissions
33,467
36,339
35,451
Product Delivery NORTH AMERICA
28,221
31,327
30,074
Business Travel NORTH AMERICA
5,246
5,012
5,377
Biomass •
16,265
17,870
18,743
CO 2 from Biomass** NORTH AMERICA
16,265
17,870
18,743
Since May 2010, we have been using 100 percent greatly renewable electrical energy in all our facilities worldwide by purchasing certified Renewable Energy Credits (RECS) and continuing a long-term Power Purchase Agreement (PPA) with our local electric provider. This continued for fiscal 2013. We source Renewable Energy Credits from multiple suppliers: Native Energy, Green Mountain Energy and Sterling Planet. We also have a Purchase Power Agreement (PPA) with alternative energy supplier Wolverine Power Marketing Cooperative. The PPA from Wolverine Power is a contract for 100 percent wind generated energy from the John Deere Harvest Wind Farm located in Huron County, Michigan. This contract represents another 24,000,000 kilowatt hours annually. The 3-year energy supply contract began on January 1, 2008, and serves 100 percent of the electric needs of our 171st and Hickory facilities. At the time of the contract signing, it represented the largest single wind energy contract ever recorded in Michigan for a non-utility customer. Our current PPA contract with Wolverine Power Marketing Cooperative is a 5-year, 30,750 megawatt hour contract which began January 1, 2013.
For calendar year 2012, we purchased over 84,000 MWh of RECs to offset 100 percent of our electrical energy use worldwide. Savings from energy efficiency suggestions from our employees covered the additional expenses we incurred in purchasing RECs. The Herman Miller Energy Center generates 92 percent of the energy needed for heating and cooling the Zeeland, Michigan Main Site’s manufacturing operations from the incineration of wood waste.
•
Metric tons of CO2 (CO2 equivalent) Third-Party Verified
1. 100 percent of our greenhouse gas emissions from electricity and 65 percent of our total emissions were offset by RECs. 2. The purchase and retirement of 135,532,000 kWh of RECs were third-party verified 3. Our 2012 worldwide Scope 1, Scope 2, and Biomass emissions have been third-party verified
We are measuring these results in support of our new Earthright strategy: Resource Smart goals for Waste (air emissions, hazardous waste, and solid waste to a landfill), Water, and Energy. We look forward to reporting our waste numbers as well as against the new metrics for water and energy next year.
As part of our environmental advocacy, we try to create products that reduce energy use for our consumers. LED technology in the Flute personal light uses 30 to 50 percent less energy than traditional task lights. The Twist LED Task Light uses 45 to 60 percent less energy than traditional under-cabinet fluorescent task lights. Resource Smart Summary We were pleased with the overall reduction in our operational footprint last year, ending up with a 92 percent reduction in the original 1994 goal. We expect to see a continued reduction next year.
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Amount of Gas Using from 2010 to 2013 Compared to 2009’s Amount
Design stylists would not understand this place. But those interested in the living and working processes of an exceptional mind would find it quite engrossing. Eco-inspired Designs: Design for the Environment (DfE) Initiative 10-year Earthright Commitments:
100%
• 100 percent DfE-approved products • 100 percent level
2009
353,500 MMBtu
96% 2010
340,500 MMBtu
85% 2011
3 01 , 3 1 0 0 M M B t u
83% 2012
294,085 MMBtu
73% 2013
50
353,500 MMBtu
Herman Miller Cares
• 3 certified products Divert 125,000 tons of product/year
We believe that good design is important. Good design at Herman Miller includes asking the question, “Have we made the best choices possible?” Only by continuing to ask that question,can we be confident that we are making better products. Our Design for the Environment Team has focused on three key areas: material chemistry, disassembly, and recycle ability. In order to encompass more of the product life cycle, we are now including a fourth area, the life cycle impacts from our supply chain in what we are calling DfE 2.0. We are raising the bar in what we demand from our products and still working towards the day when everything that we sell meets our DfE protocol. Good design also includes thinking about how to recycle used products. Our program, re-purpose, gives new life to furniture that’s no longer needed. We provide one source for dispensing furniture assets to reduce your environmental footprint. Designing our products with consideration for their environmental impact is a central corporate strategy.
We’re focused on incorporating environmentally sustainable materials, features, and manufacturing processes into product designs. Our goal for 2013 was 65 percent of all product sales coming from DfE-approved products; we achieved 65.7 percent. As part of DfE, full life cycle assessments (LCA) have been conducted for major product categories/ product lines representing 79 percent of revenues. LCA is a tool that, from raw material extraction through end of life management, identifies environmental impacts assignable to products and services. LCAs help to quantify how much energy is used and the effects of that energy use in several impact categories. Since we try to incorporate recycled materials into all of our products, we carefully monitor each product’s weight and the percentage of recycled content used. We work to balance a high percentage of recycled content with our desire to provide the most environmentally safe materials. We work toward the day when we use no new molecules to make our products. We envision a time when virgin resources are not taken from the ground in order to produce the products that we make, but instead rely on materials either from the technosphere (materials that were previously incorporated into an existing product that has reached the end of its life) or bio-based renewables as raw materials.
The development of DfE 2.0 continued throughout fiscal 2013, and we are launching DfE 2.0 during fiscal 2014. We strive to use materials with the safety material chemistry and only recycled and bio-based materials; we design our products to minimize the impacts of their life cycle; and we want our products to be part of a closed-loop recycling system. BIFMA Level Certification BIFMA level TM is the certification program for the BIFMA e3-2008: Business and Institutional Furniture Sustainability Standard (BIFMA e3). It has been created to deliver the most open and transparent means of evaluating and communicating the environmental and social impacts of furniture products in the built environment. At the end of fiscal 2013, 62 percent of our product lines were level certified, with 18 percent at level three certification. GREENGUARD Certification Herman Miller’s major lines of furniture, seating, and storage, including Meridian products, have achieved GREENGUARD Gold certification. GREENGUARD Certified products are certified to GREENGUARD standards for low chemical emissions into indoor air during product usage. For more information, visit ul.com/gg.
Wood from Responsibly-managed Forests We acquired Forest Steward ship Council® (FSC®) Chain of Custody Certification at our Zeeland, Michigan, Main Site manufacturing facility in 2007. In 2011, we expanded the scope of our certification to include our Spring Lake, Michigan facilities making filing and storage products. In May 2013, Herman Miller began offering many standard laminate and veneer work surfaces and storage products with wood front sand tops as FSC® certified products. The detailed list of products, with exceptions, may be found on the “Certified Wood” page of Herman Miller’s website. Herman Miller subsidiary Geiger International’s Fulton manufacturing facility in Atlanta, Georgia, was granted FSC Chain of Custody Certification in 2009. Geiger can offer FSC certified products manufactured at the Atlanta facility.
sustainability documentation about products for all major green building rating systems. We continue to work to expand our product catalog on ecoScorecard to make pursuing LEED certification easier for our customers. Fiscal 2013 in Review Fiscal 2013 was a successful year showing overall improvement. Our environmental footprint was reduced by one percent. In other words, our reduction to our 1994 baseline year increased from 91 to 92 percent. Sales from Design for the Environmentapproved products rose by six percent over the fiscal 2012.
EcoScorecard In 2010, Herman Miller became the first large contract furniture manufacturer to incorporate ecoScorecard SM into its product catalog. Herman Miller ecoScorecard is a free, web-based technology platform providing environmental information and
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Quality in an organization depends on responsibility that is shared rather than simply parceled out. This concept of “problem ownership” is common to Eames and Herman Miller.
—Ralph Caplan
We hope our Better World Report will give you some idea of the scope of our efforts to make the world a better place. We update this report annually. We make every effort to respond to all Global Reporting Initiative (GRI) disclosures; we report additional GRI data on website: hermanmiller.com.
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