MILLERKNOLL, INC. (Dollars in millions, except share data) The following is management's discussion and analysis of certain significant factors that affected the Company's financial condition, earnings and cash flows during the periods included in the accompanying Condensed Consolidated Financial Statements and should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year endedMay 29, 2021 . References to "Notes" are to the footnotes included in the accompanying Condensed Consolidated Financial Statements. Business Overview The Company researches, designs, manufactures, sells, and distributes furnishings and accessories, for use in various environments including office, healthcare, educational, and residential settings, and provides related services that support companies all over the world. The Company's products are sold through independent contract office furniture dealers as well as the following channels: direct customer sales, independent retailers, owned retail studios and stores, direct-mail catalogs, architects and designers, the Company's eCommerce platforms, and an owned contract furniture dealer. The following is a summary of results for the three months endedNovember 27, 2021 : •Net sales were$1,026.3 million and orders were$1,157.9 million , representing an increase of 63.9% and 83.9%, respectively, when compared to the same quarter of the prior year. The increase in net sales was driven by the consolidation of Knoll results, as well as growth across each of our segments, as compared to the same quarter of the prior year. On an organic basis, which excludes the impact of acquisitions and foreign currency translation, net sales were$695.7 million (*) and orders were$795.7 million (*), representing an increase of 11.1%(*) and 26.4%(*) , respectively, when compared to the same quarter of the prior year. •Gross margin was 34.2% as compared to 39.0% for the same quarter of the prior year. In the current year, this included the negative impact of charges totaling$4.8 million related to the initial purchase accounting effects of the Company's acquisition of Knoll. The decrease in gross margin was also driven by commodity cost pressures as well as rising labor and freight expenses. •Operating expenses increased by$173.6 million or 100.2% as compared to the same quarter of the prior year. Operating expenses in the current quarter included$41.1 million (*) of transaction and integration related costs associated with the Knoll acquisition and$11.3 million (*) of charges related to the purchase accounting amortization effects of the merger. After excluding the impact of purchase accounting amortization and the transaction and integration related costs, the addition of Knoll increased operating expenses by$99.1 million . •The effective tax rate was 77.6% compared to 23.5% for the same quarter of the prior year. •Diluted loss per share was$0.05 , a 105.7% decrease as compared to the prior year. Excluding transaction and integration related costs and the amortization of purchased intangible assets adjusted diluted earnings per share was$0.51 (*), a 42.7%(*) decrease as compared to prior year adjusted diluted earnings per share. (*) Non-GAAP measurements; see accompanying reconciliations and explanations under the heading "Reconciliation of Non-GAAP Financial Measures." The following summary includes the Company's view of the economic environment in which it operates: •The Company has experienced operational challenges within its production facilities and supply networks. Broad-based shortages of production labor and rising material and freight expenses negatively impacted net sales and gross margins during the quarter. •The Company's financial performance is sensitive to changes in certain input costs, including steel and steel component parts. The market price of steel in the second quarter of fiscal 2022 was higher than the same period of the prior year and negatively impacted consolidated results on a year-over-year basis. The price of steel is expected to continue to unfavorably impact consolidated gross margin in fiscal 2022. Ongoing cost reduction initiatives and price increases implemented in the first and second quarters of fiscal 2022 are expected to help offset these pressures over time. MillerKnoll, Inc. and Subsidiaries 27 -------------------------------------------------------------------------------- •Following industry-wide declines in order volume within theNorth America contract furniture industry, we have had a rebound in activity in the first two quarters of the fiscal year driven by the implementation of initial return-to-office plans for many businesses. In addition, demand levels in the contract business outsideNorth America continued to improve in the quarter relative to prior year levels. •Overall demand levels within the Company's Global Retail business segment showed continued strength in the first two quarters of this fiscal year. The remaining sections within Item 2 include additional analysis of the three and six months endedNovember 27, 2021 , including discussion of significant variances compared to the prior year periods. COVID-19 Update The Company continues to respond to the challenges brought about by the COVID-19 pandemic. Workplace restrictions are regionally applied based on the recommendations of local government and health authorities. Demand for certain of the Company's products and services, particularly in the Contract channel of the business, has been impacted. In addition, the Company's ability to timely fulfill orders across all channels continues to be challenged by supply chain constraints. We believe the investments we've made in people, technology, and products have positioned us well to capitalize on emerging opportunities as our customers' needs have changed throughout the COVID-19 pandemic. This has allowed our Retail business to take advantage of the unanticipated emerging work-from-home trend as well as "home is my castle" trends as consumers are focusing on and upgrading their broader home environments. Despite this, the duration of the pandemic, supply chain constraints, future demand for our products, and related impacts remain difficult to estimate. Employee Safety and Health The health and well-being of our employees remains top of mind. We continue to take a regional approach to restrictions based on active COVID-19 case levels and recommendations from local health authorities. Contact tracing is active in all regions to help track and control the spread of the virus. We also continue to employ a variety of other safety measures including domestic and international travel restrictions, extensive cleaning protocols, temperature and health screenings, personal protective equipment, and visitor safety guidelines. We continue to encourage vaccinations with our employees. Federal Contractor Vaccine Mandate OnSeptember 9, 2021 ,President Biden signed Executive Order 14042, Ensuring Adequate COVID Safety Protocols for Federal Contractors (Order). The Order directs executive departments and agencies to contractually obligate federal contractors and their subcontractors to comply with certain workplace safety standards concerning COVID-19. To implement the Order, theSafer Federal Workforce Task Force (Task Force ) issued its COVID-19 Workplace Safety Guidance for federal contractors onSeptember 24, 2021 . Through a series of subsequent orders and memoranda, theFederal Acquisition Regulation Council and other federal agencies published their own instructions for implementation of the Order by federal contractors and their subcontractors. The Order and subsequent guidance by the federal government are facing legal challenges in federal courts.MillerKnoll is a party to numerous federal government contracts. We are actively monitoring instructions and guidance issued by the federal government regarding implementation of the Order as well as the impact of any pending legal challenges on our obligations under the mandate. Customer Focus We remain uniquely positioned to serve our customers through multiple channels with the most comprehensive portfolio of products in the industry. As our customers develop their post-pandemic work plans, there is a notable shift to work being done from a number of places, with the office as a destination - a place where employees want to be rather than are required to be. We are ready to capture the many opportunities caused by this shift as our commercial customers rethink their real estate portfolios, redesign their workplaces, and seek to provide healthy and productive home work environments. Our focus and digital investments in the retail space continue to pay off as we meet customers where they are looking to do business with us. We have begun to offer products from MillerKnoll brands across websites. Investments in our retail operations and systems are making it easier for customers to do business with us, we are introducing new and enhanced eCommerce sites globally, and social media and email marketing continue to drive conversion. We also are continuing to invest in brick-and-mortar retail spaces that allow our customers to experience our products firsthand. HAY's European stores, Knoll showrooms, and DWR studios continue to reflect positive momentum. OurHerman Miller 28 Form 10-Q -------------------------------------------------------------------------------- seating stores continue to exceed our initial revenue and operating profit expectations as we seek to educate customers about the health benefits of ergonomic seating. Manufacturing and Retail Operations Current labor and supply chain constraints have put pressure on the ability of our manufacturing operations to increase capacity as order volume has increased. We expect these constraints to ease over time; however, we will likely face similar capacity challenges throughout the balance of this fiscal year. Manufacturing facilities and retail operations continue to operate with enhanced safety precautions. All facilities operate within the context of local guidance from government and health authorities, and we will continue to adjust to ensure we are acting in accordance with these guidelines. Reconciliation of Non-GAAP Financial Measures This report contains non-GAAP financial measures that are not in accordance with, nor an alternative to, generally accepted accounting principles (GAAP) and may be different from non-GAAP measures presented by other companies. These non-GAAP financial measures are not measurements of our financial performance under GAAP and should not be considered an alternative to the related GAAP measurement. These non-GAAP measures 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. Our presentation of non-GAAP measures 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 equal prominence of our GAAP results. Reconciliations of these non-GAAP measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are provided in the financial tables included within this report. The Company believes these non-GAAP measures are useful for investors as they provide financial information on a more comparative basis for the periods presented. The non-GAAP financial measures referenced within this presentation include: Adjusted Earnings per Share and Organic Sales Growth (Decline). Adjusted Earnings per Share represents reported diluted earnings per share excluding the impact from adjustments related to acquisition and integration charges, amortization of purchased intangibles, debt restructuring charges, restructuring expenses and other special charges or gains, including related taxes. These adjustments are described further below. Organic Sales Growth (Decline) represents the change in sales and orders, excluding currency translation effects and the impact of acquisitions. Acquisition and Integration Charges: Costs related directly to the Knoll acquisition including legal, accounting and other professional fees as well as integration-related costs. Integration-related costs include severance, accelerated stock-based compensation expenses, asset impairment charges and other cost reduction efforts or reorganization initiatives. Amortization of Purchased Intangibles: Includes expenses associated with the fair value adjustment to inventory and amortization of acquisition related intangibles acquired as part of the Knoll acquisition. The revenue generated by the associated intangible assets has not been excluded from the related non-GAAP financial measure. We exclude the impact of the amortization of purchased intangibles, including the fair value adjustment to inventory, as such non-cash amounts were significantly impacted by the size of the Knoll acquisition. Furthermore, we believe that this adjustment enables better comparison of our results as Amortization of Purchased Intangibles will not recur in future periods once such intangible assets have been fully amortized. Any future acquisitions may result in the amortization of additional intangible assets. Although we exclude the Amortization of Purchased Intangibles in these non-GAAP measures, we believe that it is important for investors to understand that such intangible assets were recorded as part of purchase accounting and contribute to revenue generation. Debt Restructuring Charges: Includes expenses associated with the restructuring of debt as part of financing the Knoll acquisition. We excluded these items from our non-GAAP measures because they relate to a specific transaction and are not reflective of our ongoing financial performance. Restructuring expenses: Include actions involving facilities consolidation and optimization, targeted workforce reductions, and costs associated with an early retirement program. Special charges: Include certain costs arising as a direct result of COVID-19. Tax Related Items: We excluded the income tax benefit/provision effect of the tax related items from our non-GAAP measures because they are not associated with the tax expense on our ongoing operating results. MillerKnoll, Inc. and Subsidiaries 29 -------------------------------------------------------------------------------- The following tables reconcile net sales to organic net sales for the periods ended as indicated below: Three Months Ended November 27, 2021 Americas International Retail Knoll Intersegment Total Elimination Net Sales, as reported$ 361.5 $ 125.1 $
210.0 $ 336.3 $ (6.6) $ 1,026.3
% change from PY 4.1 % 23.3 % 18.2 % N/A N/A 63.9 %
Adjustments
Acquisitions - - - (336.3) 6.6 (329.7)
Currency Translation Effects (1) (0.9) (0.1) 0.1 - - (0.9)
Net Sales, organic $ 360.6 $ 125.0 $ 210.1 $ - $ - $ 695.7
% change from PY 3.9 % 23.2 % 18.3 % N/A N/A 11.1 %
Three Months Ended
November 28, 2020
Americas International Retail Knoll Intersegment Total
Elimination
Net Sales, as reported $ 347.2 $ 101.5 $ 177.6 $ - $ - $ 626.3 (1) Currency translation effects represent the estimated net impact of translating current period sales and orders using the average exchange rates applicable to the comparable prior year period
Six Months Ended
November 27, 2021
Americas International Retail Knoll Intersegment Total
Elimination
Net Sales, as reported $ 686.8 $ 224.1 $ 422.6 $ 492.7 $ (10.2) $ 1,816.0
% change from PY (4.3) % 14.6 %
24.2 % N/A N/A 44.9 %
Adjustments
Acquisitions - - - (492.7) 10.2 (482.5)
Currency Translation Effects (1) (1.7) (4.8) (1.7) - - (8.2)
Net Sales, organic $ 685.1 $ 219.3 $ 420.9 $ - $ - $ 1,325.3
% change from PY (4.5) % 12.2 % 23.7 % N/A N/A 5.8 %
Six Months Ended
November 28, 2020
Americas International Retail Knoll Intersegment Total
Elimination
Net Sales, as reported $ 717.2 $ 195.5 $ 340.3 $ - $ - $ 1,253.0 (1) Currency translation effects represent the estimated net impact of translating current period sales and orders using the average exchange rates applicable to the comparable prior year period
30 Form 10-Q --------------------------------------------------------------------------------
The following table reconciles earnings per share - diluted to adjusted earnings per share - diluted for the three and six months ended:
Three Months Ended Six Months Ended
November 27, 2021 November
28, 2020
(0.05) $ 0.87 $ (0.92) $ 2.10
Non-comparable items:
Add: Special charges, after tax - - - 0.01
Add: Amortization of purchased intangibles,
after tax 0.16 - 0.52 -
Add: Acquisition and integration charges,
after tax 0.40 - 1.26 -
Add: Debt extinguishment, after tax - - 0.14 -
Add: Restructuring expenses, after tax - 0.02 - 0.02
Adjusted Earnings per Share - Diluted $ 0.51 $ 0.89 $ 1.00 $ 2.13
Weighted Average Shares Outstanding (used
for Calculating Adjusted Earnings per
Share) - Diluted 75,304,752 59,267,398 70,803,483 59,043,928
Note: The adjustments above are net of tax. For the three and six months ended
Analysis of Results for Three and Six Months The following table presents certain key highlights from the results of operations for the three and six months ended:
Three Months Ended Six Months Ended
November 27, November 28, November 27, November 28,
(In millions, except share data) 2021 2020 % Change 2021 2020 % Change
Net sales $ 1,026.3 $ 626.3 63.9 % $ 1,816.0 $ 1,253.0 44.9 %
Cost of sales 675.7 382.1 76.8 % 1,187.9 758.8 56.5 %
Gross margin 350.6 244.2 43.6 % 628.1 494.2 27.1 %
Operating expenses 346.8 173.2 100.2 % 677.1 327.8 106.6 %
Operating earnings (loss) 3.8 71.0 (94.6) % (49.0) 166.4 (129.4) %
Other expenses, net 8.2 2.2 272.7 % 26.1 3.7 605.4 %
(Loss) Earnings before income
taxes and equity income (4.4) 68.8 (106.4) % (75.1) 162.7 (146.2) %
Income tax (benefit) expense (3.4) 16.2 (121.0) % (14.1) 36.9 (138.2) %
Equity (loss) income from
nonconsolidated affiliates, net of
tax (0.1) 0.2 (150.0) % - 0.4 (100.0) %
Net (loss) earnings (1.1) 52.8 (102.1) % (61.0) 126.2 (148.3) %
Net earnings attributable to
redeemable noncontrolling
interests 2.3 1.5 n/a 3.9 2.0 n/a
Net (loss) earnings attributable to MillerKnoll, Inc.$ (3.4) $ 51.3 (106.6) %$ (64.9) $ 124.2 (152.3) % (Loss) Earnings per share - diluted$ (0.05) $ 0.87 (105.7) %$ (0.92) $ 2.10 (143.8) % Orders$ 1,157.9 $ 629.7 83.9 %$ 2,074.4 $ 1,185.7 75.0 % Backlog$ 967.3 $ 403.4 139.8 % MillerKnoll, Inc. and Subsidiaries 31
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The following table presents select components of the Company's Condensed Consolidated Statements of Comprehensive (Loss) Income as a percentage of net sales, for the three and six months ended:
Three Months Ended Six Months Ended
November 27, 2021 November 28, 2020 November 27, 2021 November 28, 2020
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 65.8 61.0 65.4 60.6
Gross margin 34.2 39.0 34.6 39.4
Operating expenses 33.8 27.7 37.3 26.2
Operating earnings (loss) 0.4 11.3 (2.7) 13.3
Other expenses, net 0.8 0.4 1.4 0.3
(Loss) earnings before income taxes and
equity income (0.4) 11.0 (4.1) 13.0
Income tax (benefit) expense (0.3) 2.6 (0.8) 2.9
Net (loss) earnings (0.1) 8.4 (3.4) 10.1
Net earnings attributable to redeemable
noncontrolling interests 0.2 0.2 0.2 0.2
Net (loss) earnings attributable to
MillerKnoll, Inc. (0.3) 8.2 (3.6) 9.9
Net Sales
The following charts present graphically the primary drivers of the
year-over-year change in net sales for the three and six months ended
November 27, 2021 . The amounts presented in the graphs are expressed in millions
and have been rounded.
[[Image Removed: mlkn-20211127_g1.jpg]] [[Image Removed: mlkn-20211127_g2.jpg]]
Net sales increased $400 million or 63.9% in the second quarter of fiscal 2022
compared to the second quarter of fiscal 2021. The following items contributed
to the change:
•Increase of $330 million due to the acquisition of Knoll.
•Increased sales volumes within the Global Retail, International Contract and
Americas Contract segment contributed to sales growth in the quarter. The Global
Retail segment saw continued growth from investments made to strengthen our
operational foundation and drive new customer acquisition. The International and
Americas contract segments' growth was driven by increased demand as customers
accelerate return to workplace plans.
32 Form 10-Q
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•Each area of the business experienced sales pressure during the quarter from
the impact of supply chain and internal manufacturing capacity disruption in the
quarter, which impacted the ability to ship orders.
Net sales increased $563.0 million or 45% in the first six months of fiscal 2022
compared to the first six months of fiscal 2021. The following items led to the
change:
•Increase of $483 million due to the acquisition of Knoll.
•Increased sales volume within the Global Retail segment of approximately $75
million .
•Increased sales volume within the International Contract segment of
approximately $31 million , which was driven by demand growth within each of the
geographies and brands.
•Decreased sales volume within the Americas Contract ("Americas") segment of
approximately $38 million , primarily due to supply chain and manufacturing
disruptions, which impacted the ability to ship orders.
Gross Margin
Gross margin was 34.2% in the second quarter of fiscal 2022 as compared to 39.0%
in the second quarter of fiscal 2021. The following factors summarize the major
drivers of the year-over-year change in gross margin percentage:
•Cost pressures from commodities, freight and product distribution costs had a
negative impact on gross margin of approximately 330 basis points.
•Increased labor costs, including the impact of benefits reinstated at the end
of the last fiscal year, had a negative impact on margin of approximately 70
basis points.
•Amortization of purchased intangibles related to the Knoll acquisition had a
negative impact on gross margin of approximately 50 basis points.
•Unfavorable channel and product mix contributed to the remaining decrease in
gross margin
Gross margin was 34.6% for the six month period ended November 27, 2021 as
compared to 39.4% for the same period of the prior fiscal year. The following
factors summarize the major drivers of the year-over-year change in gross margin
percentage:
•Cost pressures from commodities, freight and product distribution costs had a
negative impact on gross margin of approximately 310 basis points.
•Increased labor costs, including the impact of benefits reinstated at the end
of the last fiscal year, had a negative impact on margin of approximately 80
basis points.
•Amortization of purchased intangibles related to the Knoll acquisition has a
negative impact on gross margin of approximately 60 basis points.
•Unfavorable channel and product mix contributed to the remaining decrease in
gross margin
MillerKnoll, Inc. and Subsidiaries 33
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Operating Expenses
The following charts present graphically the primary drivers of the
year-over-year change in operating expenses for the three and six months ended
November 27, 2021 . The amounts presented in the graphs are expressed in millions
and have been rounded.
[[Image Removed: mlkn-20211127_g3.jpg]][[Image Removed: mlkn-20211127_g4.jpg]]
Operating expenses increased by $173.6 million or 100.2% in the second quarter
of fiscal 2022 compared to the prior year period. The following factors
contributed to the change:
•The acquisition of Knoll in the first quarter had the following impact on
Operating Expenses as compared to the prior year.
•$41 million of acquisition and integration charges, which include severance and
related expenses for employee separations, asset impairment charges and
professional fees and other incremental third-party expenses directly related to
the transaction and subsequent integration.
•$11 million of expenses related to the amortization of purchased intangibles
from the Knoll acquisition
34 Form 10-Q
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•Knoll operating expenses in the quarter, excluding integration related costs
incurred by Knoll and amortization of purchased intangibles, contributed $99
million to the increase as compared to the same quarter in the prior year
•Compensation and benefit costs increased approximately $9 million as compared
to the same period in the prior year due to the return of certain employee
benefits that were temporarily suspended during the first quarter of the prior
year to mitigate the financial impacts of the COVID-19 pandemic.
•Increased marketing and selling costs of approximately $8 million , driven by
both the Global Retail and Americas segments.
Operating expenses increased by $349.3 million or 106.6% in the first six months
of fiscal 2022 compared to the prior year period. The following factors
contributed to the change:
•The acquisition of Knoll during the quarter had the following impact on
Operating Expenses as compared to the prior year.
•$109 million of acquisition and integration related charges, which include
severance and related charges for employee separations, asset impairment charges
and professional fees and other incremental third-party expenses directly
related to the transaction and subsequent integration.
•$38 million of expenses related to the amortization of purchased intangibles
from the Knoll acquisition
•Knoll operating expenses in the quarter, excluding integration related costs
incurred by Knoll and amortization of purchased intangibles, contributed $148
million to the increase as compared to the same quarter in the prior year
•Compensation and benefit costs increased approximately $16 million as compared
to the same period in the prior year due to the return of certain employee
benefits that were temporarily suspended during the first quarter of the prior
year to mitigate the financial impacts of the COVID-19 pandemic.
•Increased marketing and selling costs of approximately $14 million , driven by
both the Global Retail and Americas segments.
Other Income/Expense
During the three months ended November 27, 2021 , net other expense was $8.2
million , representing an unfavorable change of $6.0 million compared to the same
period in the prior year. The increase as compared to the prior year was driven
by increased interest expense of $5.7 million , related to higher levels of debt
required to finance the acquisition of Knoll.
During the six months ended November 27, 2021 , net other income/expense was
$26.1 million , representing an unfavorable change of $22.4 million compared to
the same period in the prior year. Other income/expense in the six months ended
November 27, 2021 included a loss on extinguishment of debt of approximately
$13.4 million , which represented the premium on early redemption as well as an
increase in interest expense of $7.6 million , related to higher levels of debt
required to finance the acquisition of Knoll, all of which contributed to the
increased expense as compared to the same period in the prior year.
Income Taxes
See Note 11 of the Condensed Consolidated Financial Statements for additional
information.
MillerKnoll, Inc. and Subsidiaries 35-------------------------------------------------------------------------------- Operating Segment Results The business is comprised of various operating segments as defined by generally accepted accounting principles inthe United States . These operating segments are determined on the basis of how the Company internally reports and evaluates financial information used to make operating decisions. The segments identified by the Company are Americas Contract, International Contract, Global Retail, and Knoll. Unallocated expenses are reported within the Corporate category. For descriptions of each segment, refer to Note 16 of the Condensed Consolidated Financial Statements. The charts below present the relative mix of Net sales and Operating earnings across each of the Company's segments during the three and six month periods endedNovember 27, 2021 . This is followed by a discussion of the Company's results, by reportable segment. The amounts presented in the charts are in millions and have been rounded. [[Image Removed: mlkn-20211127_g5.jpg]][[Image Removed: mlkn-20211127_g6.jpg]] [[Image Removed: mlkn-20211127_g7.jpg]][[Image Removed: mlkn-20211127_g8.jpg]] 36 Form 10-Q --------------------------------------------------------------------------------
Americas Contract ("Americas")
Three Months Ended Six Months Ended
November 27, November 28, November 27, November 28,
(Dollars in millions) 2021 2020 Change 2021 2020 Change
Net sales $ 361.5 $ 347.2 $ 14.3 $ 686.8 $ 717.2 $ (30.4)
Gross margin 101.2 123.6 (22.4) 201.3 262.6 (61.3)
Gross margin % 28.0 % 35.6 % (7.6) % 29.3 % 36.6 % (7.3) %
Operating earnings 6.3 39.1 (32.8) 17.1 97.0 (79.9)
Operating earnings % 1.7 % 11.3 % (9.6) % 2.5 % 13.5 % (11.0) %
For the three month comparative period, net sales increased $14.3 million , or
3.9%(*) on an organic basis, over the prior year period due to:
•Increased sales volumes within the segment of approximately $8 million , due
primarily to increased demand as customers implement return to workplace plans
after reduced order volume during the COVID-19 pandemic and
•The favorable impact of price increases, net of incremental discounting of $6
million and the favorable impact of foreign currency translation which increased
sales by approximately $1 million ; partially offset by
•The impact of supply chain and internal manufacturing capacity disruption in
the quarter, which impacted the ability to ship orders in the quarter. These
disruptions are estimated to have impacted net sales for the Americas Contract
segment by $20 million in the quarter.
For the six month comparative period, net sales decreased $30.4 million , or
4.5%(*) on an organic basis, over the prior year period due to:
•Decreased sales volumes within the segment of approximately $37.5 million , due
primarily to the continued impact of the COVID-19 pandemic as well as supply
chain and internal manufacturing capacity disruption, which impacted the ability
to ship orders; partially offset by
•The favorable impact of price increases, net of incremental discounting of $5
million and the favorable impact of foreign currency translation which increased
sales by approximately $2 million .
For the three month comparative period, operating earnings decreased $32.8
million , or 83.9%, over the prior year period due to:
•Decreased gross margin of $22.4 million due to a decrease in gross margin
percentage of 760 basis points. The decrease in gross margin percentage was due
primarily to the impact of higher commodity, labor, freight and product
distribution costs; and
•Increased operating expenses of $10.4 million driven primarily by Knoll
integration related severance charges of approximately $4 million , increased
marketing and selling expenses of approximately $2 million , and increased
expense from digital and technology programs of $2 million .
For the six month comparative period, operating earnings decreased $79.9
million , or 82.4%, over the prior year period due to:
•Decreased gross margin of $61.3 million due to decreased sales volumes and
decreased gross margin percentage of 730 basis points. The decrease in gross
margin percentage was due primarily to the impact of higher commodity, labor,
freight and product distribution costs; and
•Increased operating expenses of $18.6 million driven primarily by $4 million of
integration expenses related to the Knoll acquisition, increased marketing and
selling expenses of approximately $5 million , increased compensation and benefit
expenses of $5 million , and increased product development expense of $4 million .
(*) Non-GAAP measurements; see accompanying reconciliations and explanations
under the heading "Reconciliation of Non-GAAP Financial Measures."
MillerKnoll, Inc. and Subsidiaries 37
--------------------------------------------------------------------------------International Contract ("International")
Three Months Ended Six Months Ended
November 27, November 28, November 27, November 28,
(Dollars in millions) 2021 2020 Change 2021 2020 Change
Net sales $ 125.1 $ 101.5 $ 23.6 $ 224.1 $ 195.5 $ 28.6
Gross margin 40.5 35.2 5.3 74.2 68.5 5.7
Gross margin % 32.4 % 34.7 % (2.3) % 33.1 % 35.0 % (1.9) %
Operating earnings 15.2 12.9 2.3 26.5 29.1 (2.6)
Operating earnings % 12.2 % 12.7 % (0.5) % 11.8 % 14.9 % (3.1) %
For the three month comparative period, net sales increased $23.6 million , or
23.2%(*) on an organic basis, over the prior year period due to:
•Increased sales volume of approximately $27 million , driven by growth across
all geographies within the segment; partially offset by
•Price increases, net of incremental discounting, which reduced sales by $3
million . The impact of discounting was driven by larger average project sizes
across the business this quarter, as well as increased sales volume, as a
percentage of total mix, from geographies with generally higher discounting..
For the six month comparative period, net sales increased $28.6 million , or
decreased 12.2%(*) on an organic basis, over the prior year period due to:
•Increased sales volume of approximately $31 million , driven by growth across
all geographies within the segment; partially offset by
•Price increases, net of incremental discounting, which reduced sales by $6
million . The impact of discounting was driven by larger average project sizes
across the business this quarter, as well as increased sales volume, as a
percentage of total mix, from geographies with generally higher discounting.
For the three month comparative period, operating earnings increased $2.3
million , or 17.8%, over the prior year period due to:
•Increased gross margin of $5.3 million due to the increase in sales explained
above, offset in part by decreased gross margin percentage of 230 basis points
due primarily to unfavorable changes in channel and product mix as well as
increased freight and distribution costs; offset by
•Increased operating expenses of approximately $3.0 million driven primarily by
increased compensation and benefit costs as well as increased costs associated
with product development, technology and digital related activities.
For the six month comparative period, operating earnings decreased $2.6 million ,
or 8.9%, over the prior year period due to:
•Increased gross margin of $5.7 million due to the increase in sales explained
above, offset in part by decreased gross margin percentage of 190 basis points
due primarily to unfavorable changes in channel and product mix as well as
increased freight and distribution costs; offset by
•Increased operating expenses of approximately $8.3 million driven primarily by
increased compensation and benefit costs as well as increased costs associated
with product development, technology and digital related activities.
(*) Non-GAAP measurements; see accompanying reconciliations and explanations
under the heading "Reconciliation of Non-GAAP Financial Measures."
38 Form 10-Q
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Global Retail
Three Months Ended Six Months Ended
November 27, November 28, November 27, November 28,
(Dollars in millions) 2021 2020 Change 2021 2020 Change
Net sales $ 210.0 $ 177.6 $ 32.4 $ 422.6 $ 340.3 $ 82.3
Gross margin 92.1 85.4 6.7 184.7 163.1 21.6
Gross margin % 43.9 % 48.1 % (4.2) % 43.7 % 47.9 % (4.2) %
Operating earnings 23.2 29.3 (6.1) 50.9 60.8 (9.9)
Operating earnings % 11.0 % 16.5 % (5.5) % 12.0 % 17.9 % (5.9) %
For the three month comparative period, net sales increased $32.4 million , or
18.3%(*) on an organic basis, over the prior year period due to:
•Increased sales volumes of approximately $30 million which were driven
primarily by increased demand within the DWR, International and Global Hay
businesses; and
•Incremental list price increases, net of discounting, of approximately $2
million .
For the six month comparative period, net sales increased $82.3 million or
23.7%(*), on an organic basis, over the prior year period due to:
•Increased sales volumes of approximately $75 million which were driven
primarily by broad growth across the brands and geographies within the segment;
and
•Incremental list price increases, net of discounting, of approximately $5
million
For the three month comparative period, operating earnings decreased $6.1
million or 20.8% over the prior year period due to:
•Increased operating expenses of $12.8 million driven primarily by increased
store costs associated with the opening of new locations, increased compensation
and benefit costs as certain benefits suspended in the prior year were returned,
increased marketing and selling related costs, and higher IT costs driven by
increased investments within the Company's digital and eCommerce platforms;
partially offset by
•Increased gross margin of $6.7 million due to the increase in sales explained
above, offset in part by a decrease in gross margin percentage of 420 basis
points due primarily to the unfavorable impact of increased freight and product
distribution costs and unfavorable changes in product mix.
For the six month comparative period, Operating earnings decreased $9.9 million ,
or 16.3%, over the prior year period due to:
•Increased Operating expenses of $31.5 million driven primarily by increased
store costs associated with the opening of new locations, increased compensation
and benefit costs as certain benefits suspended in the prior year were returned,
increased marketing and selling related costs, and higher IT costs driven by
increased investments within the Company's digital and eCommerce platforms;
partially offset by
•Increased Gross margin of $21.6 million due to the increase in sales explained
above, offset in part by a decrease in gross margin percentage of of 420 basis
points due primarily to the unfavorable impact of increased freight and product
distribution costs, pressure from increased product material costs and
unfavorable changes in product mix.
(*) Non-GAAP measurements; see accompanying reconciliations and explanations
under the heading "Reconciliation of Non-GAAP Financial Measures."
MillerKnoll, Inc. and Subsidiaries 39
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Knoll
Three Months Ended Six Months Ended
November 27,
(Dollars in millions) 2021 November 28, 2020 Change November 27, 2021 November 28, 2020 Change
Net sales $ 336.3 $ - $ 336.3 492.7 $ - $ 492.7
Gross margin 116.8 - 116.8 167.9 - 167.9
Gross margin % 34.7 % - % 34.7 % 34.1 % - % 34.1 %
Operating (loss) (20.6) - (20.6) (74.4) - (74.4)
Operating earnings % (6.1) % - % (6.1) % (15.1) % - % (15.1) %
The Company acquired Knoll on July 19, 2021 and has consolidated the financial
results of Knoll from the acquisition date through the period ended November 27,
2021 . Knoll contributed $336.3 million in sales for the quarter and
$116.8 million of gross margin.
Knoll operating loss of $20.6 million for the three months ended includes the
following items:
•$27 million related to integration related costs, which includes severance and
related charges for employee separations and asset impairment charges.
•$16 million related to the impact of amortization expense of
acquisition-related intangible assets.
Knoll operating loss of $74.4 million for the six months ended includes the
following items:
•$49 million related to the impact of amortization of acquisition-related
intangible assets
•$57 million related to integration related costs, which include severance and
related charges for employee separations and asset impairment charges.
Corporate
Corporate unallocated expenses totaled $20.3 million for the second quarter of
fiscal 2022, an increase of $10.0 million from the second quarter of fiscal
2021. The increase was driven by $9.5 million of integration and transaction
costs related to the Knoll acquisition in the quarter.
Corporate unallocated expenses totaled $69.1 million for the first six months of
fiscal 2022, an increase of $48.6 million from the same period of fiscal 2021.
The increase was driven primarily by $48.0 million of integration and
transaction costs recorded in the quarter related to the Knoll acquisition.
Liquidity and Capital Resources
The table below summarizes the net change in cash and cash equivalents for the
six months ended as indicated.
(In millions) November 27, 2021 November 28, 2020
Cash (used in) provided by:
Operating activities $ (57.6) $ 214.6
Investing activities (1,133.8) (24.4)
Financing activities 1,035.5 (276.9)
Effect of exchange rate changes (13.2) 10.6
Net change in cash and cash equivalents $ (169.1) $
(76.1)
Cash Flows - Operating Activities Cash used in operating activities for the six months endedNovember 27, 2021 was$57.6 million , as compared to cash provided of$214.6 million in the same period of the prior year. The change in cash from operating activities as compared to the prior year, was primarily due to: •a decrease in net earnings of 187.2 million largely driven by acquisition and integration related charges of$110.0 million ; •an increase in current assets of$166.7 million compared to a decrease in current assets of$2.3 million in the prior year period. The increase in current assets in the current year was driven by an increase in accounts receivable and 40 Form 10-Q -------------------------------------------------------------------------------- inventory as sales volumes increased from the end of fiscal 2021 as well as an increase in prepaid taxes driven by an expected benefit for the current year. The increases above were offset by an increase of depreciation and amortization in the current period of$109.9 million related to the amortization of purchased intangible assets as part of the Knoll acquisition as well as an increase in stock based compensation of$22.1 million . The increase in stock based compensation included the impact of accelerated vesting for employee separations associated with the Knoll acquisition. Cash Flows - Investing Activities Cash used in investing activities for the six months endedNovember 27, 2021 was$1,133.8 million , as compared to$24.4 million in the same period of the prior year. The increase in cash outflow in the current year, compared to the prior year, was primarily due to the acquisition of Knoll, which drove a cash outflow, net of cash acquired, of$1,088.5 million . At the end of the second quarter of fiscal 2022, there were outstanding commitments for capital purchases of$14.3 million . The Company plans to fund these commitments through a combination of cash on hand and cash flows from operations. The Company expects full-year capital purchases to be between$130 million and$140 million , which will be primarily related to investments in the Company's facilities and equipment along with the inclusion of Knoll in fiscal year 2022. This compares to full-year capital spending of$59.8 million in fiscal 2021. Cash Flows - Financing Activities Cash provided from financing activities for the six months endedNovember 27, 2021 was$1,035.5 million , as compared to cash used in financing activities of$276.9 million in the same period of the prior year. The increase in cash provided in the current year, compared to the prior year, was primarily due to net borrowings of$1,007.0 million from the credit agreement the Company entered into during Q1 and proceeds of$587.5 million on the Company's credit facility. These increases were offset by: •payments of$63.4 million related to the extinguishment of the Company's former debt agreement •payments of$449.4 million on the Company's credit facility •dividends paid of$25.4 million and stock repurchases of$14.4 million . Sources of Liquidity In addition to steps taken to protect its workforce and manage business operations, the Company has taken actions to safeguard its capital position in the current environment. The Company is closely managing spending levels, capital investments, and working capital, and has temporarily suspended open market share repurchase activity as part of managing cash flows. At the end of the second quarter of fiscal 2022, the Company had a well-positioned balance sheet and liquidity profile. The Company has access to liquidity through credit facilities, cash and cash equivalents, and short-term investments. These sources have been summarized below. For additional information, refer to Note 14 to the Condensed Consolidated Financial Statements. (In millions) November 27, 2021 May 29, 2021 Cash and cash equivalents $ 227.3 $ 396.4 Marketable securities 7.4 7.7 Availability under syndicated revolving line of credit 346.5 265.2 Total liquidity $ 581.2 $ 669.3 Of the cash and cash equivalents noted above at the end of the second quarter of fiscal 2022, the Company had$208.9 million of cash and cash equivalents held outsidethe United States . In addition, the Company had marketable securities of$7.4 million held by one of its international wholly-owned subsidiaries. The Company's syndicated revolving line of credit, which matures in July, 2026, provides the Company with up to$725 million in revolving variable interest borrowing capacity and allows the Company to borrow incremental amounts, at its option, subject to negotiated terms as outlined in the agreement. Outstanding borrowings bear interest at rates based on the prime rate, federal funds rate, LIBOR or negotiated terms as outlined in the agreement. As ofNovember 27, 2021 , the total debt outstanding related to borrowings under the syndicated revolving line of credit was$363.1 million with available borrowings against this facility of$346.5 million . MillerKnoll, Inc. and Subsidiaries 41 -------------------------------------------------------------------------------- The subsidiary holding the Company's marketable securities is taxed as aUnited States taxpayer at the Company's election. Consequently, for tax purposes, allUnited States tax impacts for this subsidiary have been recorded. The Company intends to repatriate$60.1 million in cash held in certain foreign jurisdictions and as such has recorded a deferred tax liability related to foreign withholding taxes on these future dividends received in theU.S. from foreign subsidiaries of$9.5 million . The Company intends to remain indefinitely reinvested in the remaining undistributed earnings outside theU.S. The Company believes that its financial resources will allow it to manage the impact of COVID-19 on business operations for the foreseeable future which could include materially reduced revenue and profits. The Company will continue to evaluate its financial position in light of future developments, particularly those relating to COVID-19. Contractual Obligations Contractual obligations associated with ongoing business and financing activities will require cash payments in future periods. A table summarizing the amounts and estimated timing of these future cash payments as ofMay 29, 2021 was provided in the Company's annual report on Form 10-K for the year endedMay 29, 2021 . There have been material changes in certain obligations since that date as a result of the acquisition of Knoll. See the following Notes for additional discussion: Short-Term Borrowings and Long-Term Debt, Leases, Acquisitions and Fair Value Measurements. The following table summarizes the amounts and estimated timing of these future cash payments for obligations of the Company as ofNovember 27, 2021 for which there were material changes sinceMay 29, 2021 . Payments due by fiscal year (in millions) Total 2022 2023-2024 2025-2026 Thereafter Short-term borrowings and long-term debt(1)$ 1,265.0 $ 103.1
29.2 55.4 52.8 32.3
Operating leases 511.4 89.2 158.1 115.3 148.8
Pension and other post employment benefit
plans funding(2) 26.3 1.2 5.1 5.4 14.6
Shareholder dividends (3) 14.9 14.9 - - -
Other liabilities(4) 25.2 5.0 14.4 1.4 4.4
Total $ 2,012.5 $ 242.6 $ 290.5 $ 262.4 $ 1,217.0
(1)Includes the current portion of long-term debt. Contractual cash payments on
long-term debt obligations are disclosed herein based on the amounts borrowed as
of November 27, 2021 and the maturity date of the underlying debt. Estimated
future interest payments on our outstanding interest bearing debt obligations
are based on interest rates as of November 27, 2021 . Actual cash outflows may
differ significantly due to changes in borrowings or interest rates.
(2)Pension funding commitments are known for a 12-month period for those plans
that are funded; unfunded pension and post-retirement plan funding amounts are
equal to the estimated benefit payments.
(3)Represents the dividend payable as of November 27, 2021 . Future dividend
payments are not considered contractual obligations until declared.
(4)Other contractual obligations include an earn-out liability related to the
Knoll acquisition of Fully. The maximum earn-out liability is $10.3 million and
is based on certain revenue and earnings before interest, taxes, depreciation
and amortization targets within the next two years. Additionally, other
contractual obligations include long-term commitments related to deferred and
supplemental employee compensation benefits, and other post-employment benefits.
Guarantees
See Note 13 to the Condensed Consolidated Financial Statements.
Variable Interest Entities
See Note 18 to the Condensed Consolidated Financial Statements.
Contingencies
See Note 13 to the Condensed Consolidated Financial Statements.
42 Form 10-Q
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Critical Accounting Policies
The Company strives to report financial results clearly and understandably. The
Company follows accounting principles generally accepted in the United States in
preparing its consolidated financial statements, which require certain estimates
and judgments that affect the financial position and results of operations for
the Company. The Company continually reviews the accounting policies and
financial information disclosures. A summary of the more significant accounting
policies that require the use of estimates and judgments in preparing the
financial statements is provided in the Company's Annual Report on Form 10-K for
the year ended May 29, 2021 .
New Accounting Standards
See Note 2 to the Condensed Consolidated Financial Statements.
Safe Harbor Provisions
Certain statements in this report are not historical facts but are
"forward-looking statements" as defined under Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, that are based on management's beliefs, assumptions, current
expectations, estimates, and projections about the industries in which the
Company operates, the economy, and the Company itself. Words like "anticipates,"
"believes," "confident," "estimates," "expects," "forecasts," likely," "plans,"
"projects," "could," and "should," variations of such words, and similar
expressions identify such forward-looking statements. These statements do not
guarantee future performance and involve certain risks, uncertainties, and
assumptions that are difficult to predict with regard to timing, extent,
likelihood, and degree of occurrence. These risks include, without limitation,
the success of our growth strategy, our success in initiatives aimed at
achieving long-term profit optimization goals, employment and general economic
conditions, the pace of economic recovery in the U.S. and in our International
markets, the increase in white-collar employment, the willingness of customers
to undertake capital expenditures, the types of products purchased by customers,
competitive-pricing pressures, the availability and pricing of raw materials,
our reliance on a limited number of suppliers, our ability to expand globally
given the risks associated with regulatory and legal compliance challenges and
accompanying currency fluctuations, changes in future tax legislation or
interpretation of current tax legislation, the ability to increase prices to
absorb the additional costs of raw materials, changes in global tariff
regulations, the financial strength of our dealers and the financial strength of
our customers, our ability to locate new retail studios and negotiate favorable
lease terms for new and existing locations and implement our studio portfolio
transformation, our ability to attract and retain key executives and other
qualified employees, our ability to continue to make product innovations, the
success of newly-introduced products, our ability to serve all of our markets,
possible acquisitions, divestitures or alliances, our ability to integrate and
benefit from acquisitions and investments, the pace and level of government
procurement, the outcome of pending litigation or governmental audits or
investigations, political risk in the markets we serve, natural disasters,
public health crises, disease outbreaks, and other risks identified in our
filings with the Securities and Exchange Commission . Therefore, actual results
and outcomes may materially differ from what we express or forecast. We
undertake no obligation to update, amend or clarify forward-looking statements.
MillerKnoll, Inc. and Subsidiaries 43
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