MillerKnoll(MLKN) - 2022 Q1 - Quarterly Report

Part I — Financial Information This section provides unaudited condensed consolidated financial statements, detailed notes, management's discussion and analysis, market risk disclosures, and internal controls information Item 1 Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, including statements of comprehensive income, balance sheets, cash flows, and stockholders' equity, along with detailed notes Condensed Consolidated Statements of Comprehensive Income This statement presents the company's net sales, gross margin, operating results, and earnings per share for the three months ended August 28, 2021, and August 29, 2020 | (Dollars in millions, except share data) | August 28, 2021 | August 29, 2020 | | :-------------------------------------- | :-------------- | :-------------- | | Net sales | $789.7 | $626.8 | | Cost of sales | 512.2 | 376.8 | | Gross margin | 277.5 | 250.0 | | Operating (loss) earnings | (52.8) | 95.4 | | Net (loss) earnings | (59.9) | 73.4 | | Net (loss) earnings attributable to Herman Miller, Inc. | $(61.5) | $73.0 | | (Loss) Earnings per share — diluted | $(0.93) | $1.24 | Condensed Consolidated Balance Sheets This balance sheet details the company's assets, liabilities, and stockholders' equity as of August 28, 2021, and May 29, 2021, reflecting significant changes from the Knoll acquisition | (Dollars in millions, except share data) | August 28, 2021 | May 29, 2021 | | :--------------------------------------- | :-------------- | :----------- | | Total Assets | $4,460.5 | $2,061.9 | | Goodwill | 1,283.9 | 364.2 | | Indefinite-lived intangibles | 493.0 | 97.6 | | Total Liabilities | 2,912.3 | 1,135.3 | | Long-term debt | 1,298.4 | 274.9 | | Total Stockholders' Equity | 1,475.6 | 849.6 | Condensed Consolidated Statements of Cash Flows This statement outlines the net cash flows from operating, investing, and financing activities for the three months ended August 28, 2021, and August 29, 2020 | (Dollars in millions) | August 28, 2021 | August 29, 2020 | | :-------------------- | :-------------- | :-------------- | | Net Cash (Used in) Provided by Operating Activities | $(51.7) | $115.9 | | Net Cash Used in Investing Activities | $(1,104.7) | $(5.1) | | Acquisitions, net of cash received | (1,088.5) | — | | Net Cash Provided by (Used in) Financing Activities | 1,001.6 | (276.5) | | Net Decrease in Cash and Cash Equivalents | (161.3) | (157.4) | Condensed Consolidated Statements of Stockholders' Equity This statement presents the changes in total stockholders' equity, including net earnings (loss) and shares issued for the Knoll acquisition, for the periods presented | (Dollars in millions, except share data) | May 29, 2021 | August 28, 2021 | | :--------------------------------------- | :----------- | :-------------- | | Total Stockholders' Equity | $849.6 | $1,475.6 |\ | Net earnings (loss) | — | (61.5) |\ | Shares issued for the acquisition of Knoll | — | 688.3 | Notes to Condensed Consolidated Financial Statements This section provides detailed notes on the company's business, accounting policies, revenue, leases, acquisitions, inventories, goodwill, employee benefits, earnings per share, stock compensation, income taxes, fair value measurements, commitments, debt, comprehensive loss, operating segments, restructuring, and variable interest entities Note 1 - Description of Business and Basis of Presentation Herman Miller, Inc. (to be renamed MillerKnoll, Inc.) designs, manufactures, and distributes interior furnishings globally, with the acquisition of Knoll, Inc. completed on July 19, 2021, and a segment reorganization effective May 30, 2021 - Acquisition of Knoll, Inc. completed on July 19, 2021[14] - Proposed name change to MillerKnoll, Inc. (subject to shareholder approval)[14] - New reportable segments: Americas Contract, International Contract, Global Retail, and Knoll, effective May 30, 2021[18][22] Note 2 - Recently Issued Accounting Standards The company adopted ASU No. 2018-14 and ASU 2019-12 on May 30, 2021, with no material effect on the consolidated financial statements - Adopted ASU No. 2018-14 (Retirement Benefits) and ASU 2019-12 (Income Taxes) on May 30, 2021[19][20] - No material impact on financial statements from adopted ASUs[19][20] Note 3 - Revenue from Contracts with Customers Total net sales for the three months ended August 28, 2021, increased to $789.7 million, primarily driven by the Knoll acquisition and growth in Global Retail and International Contract segments | (In millions) | August 28, 2021 | August 29, 2020 | | :------------ | :-------------- | :-------------- | | Net Sales | $789.7 | $626.8 | Revenue by Contract Type (Three Months Ended August 28, 2021) | Contract Type | Amount (in millions) | | :------------------------------ | :------------------- | | Product revenue (single performance obligation) | $736.3 | | Product revenue (multiple performance obligations) | $49.6 | | Service revenue | $1.9 | | Other | $1.9 | | Total | $789.7 | Revenue by Segment (Three Months Ended August 28, 2021) | Segment | Amount (in millions) | | :--------------------- | :------------------- | | Americas Contract | $325.3 | | International Contract | $99.0 | | Retail | $212.6 | | Knoll | $156.4 | Note 4 - Leases Total lease costs increased to $22.0 million for the three months ended August 28, 2021, with total undiscounted future minimum lease payments of $516.2 million for operating leases | (In millions) | August 28, 2021 | August 29, 2020 | | :------------ | :-------------- | :-------------- | | Total Lease Costs | $22.0 | $13.4 | Undiscounted Annual Future Minimum Lease Payments (as of August 28, 2021) | Fiscal Year | Amount (in millions) | | :---------- | :------------------- | | 2022 | $88.5 | | 2023 | $83.5 | | 2024 | $74.3 | | 2025 | $65.8 | | 2026 | $50.3 | | Thereafter | $153.8 | | Total | $516.2 | - Weighted average remaining lease term for operating leases: 7 years (as of August 28, 2021)[30] - Weighted average discount rate for operating leases: 2.4% (as of August 28, 2021)[30] Note 5 - Acquisitions Herman Miller acquired Knoll, Inc. on July 19, 2021, for $1,887.3 million, resulting in significant goodwill and intangible assets, with Knoll contributing $156.4 million in revenue and a net loss of $45.9 million - Acquisition of Knoll, Inc. completed on July 19, 2021[33] Preliminary Acquisition Date Fair Value of Consideration Transferred for Knoll | Consideration Type | Amount (in millions) | | :----------------- | :------------------- | | Cash Consideration | $800.7 | | Share Consideration | $688.3 | | Replacement Share-Based Awards | $22.4 | | Consideration for payment to settle Knoll's outstanding debt | $376.9 | | Total | $1,887.3 | Preliminary Fair Value of Assets Acquired and Liabilities Assumed (as of acquisition date) | Item | Fair Value (in millions) | | :-------------------- | :----------------------- | | Total assets acquired | $2,646.4 | | Total liabilities assumed | $759.2 | | Net Assets Acquired | $1,887.2 | | Goodwill | $925.9 | | Intangible assets | $770.4 | - Knoll contributed $156.4 million of Revenue and $45.9 million of Net Loss to the consolidated statements for the period from acquisition date to August 28, 2021[39] Pro Forma Results of Operations (Three Months Ended) | (In millions) | August 28, 2021 | August 29, 2020 | | :------------ | :-------------- | :-------------- | | Net sales | $943.9 | $891.8 | | Net earnings attributable to Herman Miller, Inc. | $(30.2) | $30.9 | Note 6 - Inventories, net Total inventories significantly increased to $446.2 million as of August 28, 2021, primarily in finished goods, work in process, and raw materials, reflecting the Knoll acquisition | (In millions) | August 28, 2021 | May 29, 2021 | | :------------------------ | :-------------- | :----------- | | Finished goods and work in process | $329.1 | $166.7 | | Raw materials | 117.1 | 46.9 | | Total | $446.2 | $213.6 | Note 7 - Goodwill and Indefinite-Lived Intangibles Goodwill and indefinite-lived intangible assets substantially increased due to the Knoll acquisition, with no impairment identified for reorganized reporting units | (In millions) | Goodwill | Indefinite-lived Intangible Assets | | :-------------------------------- | :------- | :--------------------------------- | | May 29, 2021 | $364.2 | $97.6 | | Acquisition of Knoll | 925.9 | 396.9 | | August 28, 2021 | $1,283.9 | $493.0 | - No identified indicators of impairment for reporting units or indefinitely-lived intangible assets during the three months ended August 28, 2021[49] Note 8 - Employee Benefit Plans The net periodic benefit cost for defined benefit pension plans varied between domestic and international plans, with a weighted-average expected long-term rate of return on plan assets of 4.98% Net Periodic Benefit Cost (Three Months Ended August 28, 2021) | (In millions) | Domestic Pension Benefits | International Pension Benefits | | :------------ | :------------------------ | :----------------------------- | | Service cost | $0.1 | $— | | Interest cost | $0.5 | $0.8 | | Expected return on plan assets | $(1.0) | $(1.8) | | Net amortization loss | $— | $1.7 | | Net periodic benefit cost | $(0.4) | $0.7 | - Weighted-average expected long-term rate of return on plan assets is 4.98%[50] Note 9 - Earnings Per Share Diluted loss per share for the three months ended August 28, 2021, was $(0.93), a significant decrease from $1.24 in the prior year, based on an increased number of weighted-average common shares outstanding | | August 28, 2021 | August 29, 2020 | | :-------------------------------------------------------------------------------- | :-------------- | :-------------- | | (Loss) Earnings per Share - Diluted | $(0.93) | $1.24 | | Denominator for basic EPS, weighted-average common shares outstanding | 66,302,214 | 58,831,305 | | Denominator for diluted EPS | 66,302,214 | 58,964,268 | Note 10 - Stock-Based Compensation Stock-based compensation expense increased significantly to $15.1 million, primarily due to the Knoll acquisition and accelerated expenses from workforce reductions | (In millions) | August 28, 2021 | August 29, 2020 | | :---------------------------- | :-------------- | :-------------- | | Stock-based compensation expense | $15.1 | $1.5 | - Increase in stock-based compensation expense driven by the addition of Knoll's equity-based compensation awards and accelerated expense related to workforce reductions as part of the Knoll integration[53] Note 11 - Income Taxes The effective tax rate decreased to 15.3% for the three months ended August 28, 2021, primarily due to a pre-tax book loss and non-deductible acquisition costs related to Knoll | | August 28, 2021 | August 29, 2020 | | :-------------------- | :-------------- | :-------------- | | Effective Tax Rate | 15.3% | 22.0% | - The decrease in the effective tax rate for the three months ended August 28, 2021, resulted from a pre-tax book loss for the quarter coupled with non-deductible discrete compensation and acquisition costs in connection with the Knoll acquisition[55] Note 12 - Fair Value Measurements The fair value of long-term debt increased to $1,317.2 million due to new debt for the Knoll acquisition, and the company holds various financial instruments measured at fair value Carrying Value and Fair Value of Long-Term Debt (in millions) | | August 28, 2021 | May 29, 2021 | | :------------ | :-------------- | :----------- | | Carrying value | $1,342.9 | $277.1 | | Fair value | $1,317.2 | $284.8 | - Contingent consideration obligation related to Knoll's acquisition of Fully: $13.5 million (as of August 28, 2021), classified as a Level 3 measurement[65] - Fair value of interest rate swap agreements (liability): $15.7 million (as of August 28, 2021). These are designated as cash flow hedges[77][75] - Foreign currency forward contracts are not designated as hedging instruments; changes in fair value are recorded within 'Other (income) expense, net' in the Consolidated Statements of Comprehensive Income[73] Note 13 - Commitments and Contingencies The warranty reserve increased to $69.8 million, partly due to the Knoll acquisition, and the company maintains performance bonds and standby letters of credit with no material legal proceedings Changes in Warranty Reserve (in millions) | | August 28, 2021 | August 29, 2020 | | :------------------------------ | :-------------- | :-------------- | | Accrual Balance — beginning | $60.1 | $59.2 | | Accrual for warranty matters | 5.4 | 4.6 | | Settlements and adjustments | (5.8) | (3.5) | | Acquired through business acquisition | 10.1 | — | | Accrual Balance — ending | $69.8 | $60.3 | - Maximum financial exposure related to performance bonds: approximately $7.3 million (as of August 28, 2021)[82] - Maximum financial exposure from standby letters of credit: approximately $15.4 million (as of August 28, 2021)[83] Note 14 - Short-Term Borrowings and Long-Term Debt Total debt significantly increased to $1,342.9 million due to new credit agreements for the Knoll acquisition, including a $725 million revolving line of credit, a $400 million Term Loan A, and a $625 million Term Loan B Short-term borrowings and long-term debt (in millions) | | August 28, 2021 | May 29, 2021 | | :-------------------------------------- | :-------------- | :----------- | | Total debt | $1,342.9 | $277.1 | | Long-term debt | $1,298.4 | $274.9 | - In July 2021, the Company entered into a new credit agreement to finance the Knoll acquisition, providing for a $725 million syndicated revolving line of credit, a $400 million Term Loan A, and a $625 million Term Loan B[87] - A loss on extinguishment of debt of approximately $13.4 million was recognized from the repayment of private placement notes[87] Available borrowings under the syndicated revolving line of credit (in millions) | | August 28, 2021 | May 29, 2021 | | :-------------------------------------- | :-------------- | :----------- | | Syndicated revolving line of credit borrowing capacity | $725.0 | $500.0 | | Available borrowings under the syndicated revolving line of credit | $394.6 | $265.2 | Note 15 - Accumulated Other Comprehensive Loss Accumulated other comprehensive loss increased to $(80.3) million, primarily driven by cumulative translation adjustments and unrealized losses on interest rate swap agreements Accumulated Other Comprehensive Loss (in millions) | | May 29, 2021 | August 28, 2021 | | :-------------------------------------- | :----------- | :-------------- | | Balance | $(65.1) | $(80.3) | | Net current period other comprehensive (loss) income | — | (15.2) | Note 16 - Operating Segments Effective May 30, 2021, the company reorganized its reportable segments into Americas Contract, International Contract, Global Retail, and Knoll, with the Knoll segment contributing $156.4 million in net sales but an operating loss of $53.6 million - New reportable segments: Americas Contract, International Contract, Global Retail, and Knoll, effective May 30, 2021[92][93] Net Sales by Segment (Three Months Ended August 28, 2021) | Segment | Amount (in millions) | | :--------------------- | :------------------- | | Americas Contract | $325.3 | | International Contract | $99.0 | | Global Retail | $212.6 | | Knoll | $156.4 | | Total | $789.7 | Operating Earnings (Loss) by Segment (Three Months Ended August 28, 2021) | Segment | Amount (in millions) | | :--------------------- | :------------------- | | Americas Contract | $10.5 | | International Contract | $11.3 | | Global Retail | $27.8 | | Knoll | $(53.6) | | Corporate | $(48.8) | | Total | $(52.8) | Note 17 - Restructuring Expense The company incurred $55.6 million in Knoll Integration costs for the three months ended August 28, 2021, with total integration costs expected not to exceed $100 million - Knoll Integration costs incurred for the three months ended August 28, 2021: $55.6 million[103] - Knoll Integration costs breakdown: $30.5 million for severance and employee benefit costs, $13.4 million for non-cash debt extinguishment, and $11.7 million for other integration costs[103] - Total Knoll Integration costs are expected not to exceed approximately $100 million[103] Summary of Integration Expenses by Segment (Three Months Ended August 28, 2021) | Segment | Amount (in millions) | | :--------------------- | :------------------- | | Americas Contract | $1.0 | | Knoll | $29.4 | | Corporate | $25.2 | | Total | $55.6 | Note 18 - Variable Interest Entities A long-term note receivable with a third-party dealer, previously a variable interest in a VIE, was paid in full during the quarter ended August 28, 2021 - A long-term note receivable of $1.2 million with a third-party dealer, previously a variable interest in a VIE, was paid in full during the quarter ended August 28, 2021[114] Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations The company's financial performance for the three months ended August 28, 2021, was significantly impacted by the acquisition of Knoll, leading to a 26.0% increase in net sales to $789.7 million but a 175.0% decrease in diluted EPS to $(0.93) Business Overview Herman Miller, Inc. (soon to be MillerKnoll) saw net sales increase by 26.0% to $789.7 million in Q1 fiscal 2022, driven by the Knoll acquisition, but gross margin declined and operating expenses more than doubled due to acquisition-related costs, resulting in a diluted loss per share of $(0.93) Key Financial Highlights (Three Months Ended) | Metric | August 28, 2021 | August 29, 2020 | % Change | | :----- | :-------------- | :-------------- | :------- | | Net sales | $789.7M | $626.8M | 26.0% | | Orders | $916.5M | $556.0M | 64.8% | | Gross margin | 35.1% | 39.9% | -4.8 ppts | | Operating expenses | $330.3M | $154.6M | 113.6% | | Diluted loss per share | $(0.93) | $1.24 | -175.0% | | Adjusted diluted earnings per share | $0.49 | $1.24 | -60.5% | - Organic net sales decreased by 0.4% to $629.6 million, and organic orders decreased by 34.5% to $747.9 million, excluding the impact of acquisitions and foreign currency translation[118] - Gross margin was negatively impacted by $6.3 million in charges related to Knoll acquisition purchase accounting, commodity cost pressures, and rising labor and freight expenses[118] - Operating expenses included $69 million of transaction and integration related costs and $26.2 million of charges related to initial purchase accounting effects of the Knoll merger[118] COVID-19 Update The company continues to adapt to the COVID-19 pandemic by maintaining employee safety, leveraging digital investments, and capitalizing on emerging work-from-home and office redesign trends - The company's multi-channel go-to-market approach and digital investments (e.g., reimagined websites, Work from Home landing page, Herman Miller Professional) enabled it to pivot quickly and capitalize on new opportunities arising from changing customer purchasing behaviors[120][122][123] - Capitalizing on emerging work-from-home and 'home is my castle' trends, as well as the shift to offices as destinations requiring redesigns and provision of healthy home work environments[120][126] - Manufacturing facilities operate at near-normal capacity with enhanced safety precautions, and all retail studios and stores are open at full capacity[127] Reconciliation of Non-GAAP Financial Measures The company utilizes non-GAAP financial measures, such as Adjusted Earnings per Share and Organic Sales Growth, to provide a clearer view of ongoing operational performance by excluding specific acquisition, integration, and restructuring charges - Non-GAAP financial measures include Adjusted Earnings per Share and Organic Sales Growth (Decline)[129] - Adjustments to GAAP measures exclude: acquisition and integration charges, amortization of purchased intangibles, debt restructuring charges, restructuring expenses, special charges, and related tax effects[130][131][132][133] Organic Net Sales (Three Months Ended August 28, 2021) | Segment | Net Sales, as reported | Adjustments (Acquisitions & Currency) | Net Sales, organic | | :--------------------- | :--------------------- | :------------------------------------ | :----------------- | | Americas Contract | $325.3M | $(0.8)M | $324.5M | | International Contract | $99.0M | $(4.7)M | $94.3M | | Retail | $212.6M | $(1.8)M | $210.8M | | Knoll | $156.4M | $(156.4)M | $— | | Intersegment Elimination | $(3.6)M | $3.6M | $— | | Total | $789.7M | $(152.8)M - $7.3M | $629.6M | Adjusted Earnings per Share - Diluted (Three Months Ended) | | August 28, 2021 | August 29, 2020 | | :-------------------------------------------------------------------------------- | :-------------- | :-------------- | | (Loss) Earnings per Share - Diluted | $(0.93) | $1.24 | | Add: Amortization of purchased intangibles, after tax | 0.37 | — | | Add: Acquisition and integration charges, after tax | 0.90 | — | | Add: Debt extinguishment, after tax | 0.15 | — | | Adjusted Earnings per Share - Diluted | $0.49 | $1.24 | Analysis of Results for Three Months For the three months ended August 28, 2021, net sales increased by 26.0% to $789.7 million, primarily due to the Knoll acquisition, while gross margin declined by 4.8 percentage points and operating expenses surged by 113.6% due to acquisition-related costs Key Financial Measures (Three Months Ended) | (In millions, except share data) | August 28, 2021 | August 29, 2020 | % Change | | :------------------------------- | :-------------- | :-------------- | :------- | | Net sales | $789.7 | $626.8 | 26.0 % | | Gross margin | 277.5 | 250.0 | 11.0 % | | Operating (loss) earnings | (52.8) | 95.4 | (155.3)% | | Net (loss) earnings attributable to Herman Miller, Inc. | $(61.5) | $73.0 | (184.2)% | | (Loss) Earnings per share — diluted | $(0.93) | $1.24 | (175.0)% | | Orders | $916.5 | $556.0 | 64.8 % | | Backlog | $835.9 | $400.0 | 109.0 % | - Net sales increase drivers: $153 million from Knoll acquisition, $45 million from Global Retail sales volumes, $7 million from foreign currency translation, offset by $46 million decrease in Americas Contract sales volumes[140] - Gross margin percentage decrease drivers: 360 basis points from commodity, freight, and product distribution costs; 110 basis points from increased labor costs; 100 basis points from amortization of purchased intangibles related to Knoll acquisition. Partially offset by 100 basis points from favorable channel mix[140] - Operating expenses increase drivers: $27 million transaction costs and $42 million integration costs from Knoll acquisition, $49 million Knoll operating expenses, $10 million increased compensation/benefit costs, $8 million increased studio costs, $6 million increased marketing/selling costs[141] - Other expenses, net: $18.0 million (Aug 28, 2021) compared to $1.6 million (Aug 29, 2020), primarily due to a $13.4 million loss on extinguishment of debt and increased interest expense related to Knoll acquisition financing[141] Operating Segment Results The company's operating segments experienced varied performance, with Americas Contract sales decreasing, International Contract sales increasing but earnings declining, Global Retail sales surging but earnings decreasing, and the Knoll segment contributing sales but reporting a significant operating loss due to integration costs Americas Contract ("Americas") Net sales for Americas Contract decreased by 12.1% to $325.3 million, and operating earnings declined by 81.9% to $10.5 million, primarily due to reduced sales volumes and higher costs Americas Contract Segment Results (Three Months Ended) | (Dollars in millions) | August 28, 2021 | August 29, 2020 | Change | | :-------------------- | :-------------- | :-------------- | :----- | | Net sales | $325.3 | $370.1 | $(44.8) | | Gross margin % | 30.8 % | 37.6 % | (6.8)% | | Operating earnings | 10.5 | 57.9 | (47.4) | | Operating earnings % | 3.2 % | 15.6 % | (12.4)%| - Net sales decreased 12.1% (12.3% organic) due to decreased sales volumes of approximately $45.3 million, primarily from COVID-19 impacts, partially offset by $1 million from foreign currency translation[147] - Operating earnings decreased $47.4 million due to a $38.9 million decrease in gross margin (680 basis points drop from higher commodity, labor, freight costs) and an $8.5 million increase in operating expenses (compensation, marketing, product development)[147] International Contract ("International") International Contract net sales increased by 5.3% to $99.0 million, driven by sales volume growth and foreign currency translation, but operating earnings decreased by 30.2% due to higher operating expenses International Contract Segment Results (Three Months Ended) | (Dollars in millions) | August 28, 2021 | August 29, 2020 | Change | | :-------------------- | :-------------- | :-------------- | :----- | | Net sales | $99.0 | $94.0 | $5.0 | | Gross margin % | 34.0 % | 35.4 % | (1.4)% | | Operating earnings | 11.3 | 16.2 | (4.9) | | Operating earnings % | 11.4 % | 17.2 % | (5.8)% | - Net sales increased 5.3% (0.3% organic) due to approximately $4 million in increased sales volume (Europe) and $5 million from foreign currency translation, partially offset by $4 million reduction from price increases net of discounting[149] - Operating earnings decreased $4.9 million due to increased operating expenses of $5.3 million, driven by compensation, benefits, product development, and IT projects[149] Global Retail Global Retail net sales significantly increased by 30.7% to $212.6 million, driven by broad-based demand, but operating earnings decreased by 11.7% due to a decline in gross margin and increased operating expenses Global Retail Segment Results (Three Months Ended) | (Dollars in millions) | August 28, 2021 | August 29, 2020 | Change | | :-------------------- | :-------------- | :-------------- | :----- | | Net sales | $212.6 | $162.7 | $49.9 | | Gross margin % | 43.6 % | 47.8 % | (4.2)% | | Operating earnings | 27.8 | 31.5 | (3.7) | | Operating earnings % | 13.1 % | 19.4 % | (6.3)% | - Net sales increased 30.7% (29.6% organic) due to approximately $45 million in increased sales volumes across brands, geographies, and channels, and $3 million from incremental list price increases[151] - Operating earnings decreased $3.7 million due to a 420 basis point decrease in gross margin percentage (production/material costs, freight, unfavorable product mix) and an $18.7 million increase in operating expenses (new studio costs, compensation, IT investments)[151] Knoll The newly acquired Knoll segment contributed $156.4 million in net sales but reported an operating loss of $53.6 million, primarily due to integration-related costs and amortization expense of intangible assets Knoll Segment Results (Three Months Ended August 28, 2021) | (Dollars in millions) | Amount | | :-------------------- | :----- | | Net sales | $156.4 | | Gross margin | $51.0 | | Gross margin % | 32.6 % | | Operating (loss) | $(53.6)| | Operating earnings % | (34.3)%| - Knoll's operating loss of $53.6 million includes $29.4 million related to integration costs (severance and employee separations) and $32.5 million related to amortization expense of acquisition-related intangible assets[156] Corporate Corporate unallocated expenses totaled $48.8 million for the first quarter of fiscal 2022, a significant increase primarily driven by $38.5 million in transaction and integration costs related to the Knoll acquisition - Corporate unallocated expenses totaled $48.8 million for Q1 fiscal 2022, an increase of $38.6 million from Q1 fiscal 2021[153] - The increase was driven by $38.5 million of transaction and integration costs recorded in the quarter related to the Knoll acquisition[153] Liquidity and Capital Resources Cash used in operating activities was $51.7 million, investing activities used $1,104.7 million primarily for the Knoll acquisition, and financing activities provided $1,001.6 million through new debt issuance, with total liquidity at $637.7 million Net Change in Cash and Cash Equivalents (Three Months Ended) | (In millions) | August 28, 2021 | August 29, 2020 | | :---------------------------- | :-------------- | :-------------- | | Cash (used in) provided by: | | | | Operating activities | $(51.7) | $115.9 | | Investing activities | (1,104.7) | (5.1) | | Financing activities | 1,001.6 | (276.5) | | Effect of exchange rate changes | (6.5) | 8.3 | | Net change in cash and cash equivalents | $(161.3) | $(157.4) | - Cash used in operating activities was primarily due to a $133.3 million decrease in net earnings and a $65.6 million increase in current assets (accounts receivable, inventory, prepaid expenses)[156][157] - Cash used in investing activities was primarily due to the $1,088.5 million cash outflow for the acquisition of Knoll[158] - Cash provided from financing activities was primarily due to $1,007.0 million net borrowings from a new credit agreement and a $366.6 million draw on the credit facility[160] Total Liquidity (in millions) | | August 28, 2021 | May 29, 2021 | | :-------------------------------------- | :-------------- | :----------- | | Cash and cash equivalents | $235.1 | $396.4 | | Marketable securities | 8.0 | 7.7 | | Availability under syndicated revolving line of credit | 394.6 | 265.2 | | Total liquidity | $637.7 | $669.3 | - Expected full-year capital purchases for fiscal 2022 are between $150 million and $160 million, significantly higher than $59.8 million in fiscal 2021, primarily for facilities, equipment, and Knoll's inclusion[159] Contractual Obligations (as of August 28, 2021, in millions) | Obligation | Total | 2022 | 2023-2024 | 2025-2026 | Thereafter | | :---------------------------------------- | :-------- | :------ | :-------- | :-------- | :--------- | | Short-term borrowings and long-term debt | $1,265.0 | $103.1 | $57.5 | $87.5 | $1,016.9 | | Estimated interest on debt obligations | 169.7 | 29.2 | 55.4 | 52.8 | 32.3 | | Operating leases | 516.2 | 88.5 | 157.8 | 116.1 | 153.8 | | Pension and other post employment benefit plans funding | 27.0 | 1.9 | 5.1 | 5.4 | 14.6 | | Shareholder dividends | 14.9 | 14.9 | — | — | — | | Other liabilities | 30.0 | 5.1 | 16.6 | 3.9 | 4.4 | | Total | $2,022.8 | $242.7 | $292.4 | $265.7 | $1,222.0 | Critical Accounting Policies The company's financial statements are prepared using U.S. GAAP, which necessitates certain estimates and judgments - Financial statements are prepared in accordance with U.S. GAAP, requiring certain estimates and judgments[175] New Accounting Standards Information regarding recently issued accounting standards is provided in Note 2 to the Condensed Consolidated Financial Statements - Refer to Note 2 to the Condensed Consolidated Financial Statements for information on recently issued accounting standards[176] Safe Harbor Provisions This report contains forward-looking statements that are subject to various risks and uncertainties, including economic conditions, competitive pressures, and the ability to integrate acquisitions, with actual results potentially differing materially from forecasts - The report contains forward-looking statements that are subject to risks, uncertainties, and assumptions[177] - Risks include: success of growth strategy, economic conditions, raw material availability, global expansion, changes in tax legislation, ability to integrate acquisitions, competitive-pricing pressures, and public health crises[177] Item 3 Quantitative and Qualitative Disclosures about Market Risk There have been no material changes in market risks related to interest rates and commodity prices, but the company faces foreign exchange risk from international operations and uses foreign currency forward contracts to mitigate these risks - No material changes in market risks from interest rates and commodity prices during the first three months of fiscal 2022[179] - The company is exposed to foreign exchange risk from sales and expenses transacted in foreign currencies (e.g., British pound sterling, euro, Canadian dollar, Japanese yen, Mexican peso, Hong Kong dollar, Chinese renminbi, Danish krone)[180][181] - Foreign currency forward contracts are utilized to reduce foreign currency exposure risks, with changes in fair value reported in earnings[181] Item 4 Controls and Procedures As of August 28, 2021, the company's disclosure controls and procedures were deemed effective, with Knoll's internal controls currently being integrated following its acquisition - Disclosure controls and procedures were evaluated and deemed effective as of August 28, 2021[182] - The company is integrating Knoll's internal controls over financial reporting following the July 19, 2021 acquisition[183] - No other material changes in internal control over financial reporting occurred during the quarter ended August 28, 2021[183] Part II — Other Information This section includes disclosures on legal proceedings, updated risk factors, unregistered equity sales, a list of exhibits, and official signatures Item 1 Legal Proceedings There have been no material changes in the company's legal proceedings from those reported in the Annual Report on Form 10-K for the year ended May 29, 2021 - No material changes in the company's legal proceedings from those set forth in the Annual Report on Form 10-K for the year ended May 29, 2021[185] Item 1A Risk Factors A new risk factor highlights that a continued shortage of qualified labor could negatively affect the business, potentially leading to decreased production, inability to meet demand, and higher labor costs - A new risk factor identifies that a continued shortage of qualified labor could negatively affect the business and materially reduce earnings[187] - This shortage impacts the company's ability to produce and meet customer demand, and could lead to higher wages and reduced operating results[187] Item 2 Unregistered Sales of Equity Securities and Use of Proceeds The company has one outstanding share repurchase plan authorized for $250.0 million, under which 259,663 shares were repurchased during the quarter ended August 28, 2021 - The company has one outstanding share repurchase plan with a $250.0 million authorization and no specified expiration date[188] Share Repurchase Activity (Three Months Ended August 28, 2021) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :-------------- | :------------------------------- | :--------------------------- | | 6/27/21-7/24/21 | 26,564 | $37.12 | | 7/25/21-8/28/21 | 233,099 | $43.09 | | Total | 259,663 | ~$40.11 | - As of August 28, 2021, approximately $225.68 million remained available for repurchase under the plan[189] Item 6 Exhibits This section lists the exhibits filed with the 10-Q report, including credit agreements, stock incentive plans, CEO/CFO certifications, and XBRL taxonomy documents - Exhibits filed include Credit Agreements, Knoll, Inc. Stock Incentive Plans, Certificates of the Chief Executive Officer and Chief Financial Officer (pursuant to Sarbanes-Oxley Act), and XBRL Taxonomy documents[193][194] Signatures The report is duly signed on October 6, 2021, by Andrea R. Owen, President and Chief Executive Officer, and Jeffrey M. Stutz, Chief Financial Officer, on behalf of Herman Miller, Inc - The report was signed on October 6, 2021, by Andrea R. Owen (President and Chief Executive Officer) and Jeffrey M. Stutz (Chief Financial Officer) for Herman Miller, Inc[198]