MillerKnoll(MLKN) - 2022 Q2 - Quarterly Report

Part I — Financial Information Item 1: Financial Statements (Unaudited) This section presents MillerKnoll, Inc.'s unaudited condensed consolidated financial statements, reflecting the Knoll acquisition Note 1: Description of Business and Basis of Presentation MillerKnoll, Inc. acquired Knoll, Inc. on July 19, 2021, and reorganized its reportable segments - On July 19, 2021, the company acquired Knoll, Inc. and changed its name from Herman Miller, Inc. to MillerKnoll, Inc. on November 1, 2021[17] - Effective May 30, 2021, the company reorganized its reportable segments into: Global Retail, Americas Contract, International Contract, and Knoll[21][22][23] Note 5: Acquisitions This note details the July 19, 2021 acquisition of Knoll, Inc. for approximately $1.89 billion, resulting in $943.7 million goodwill Preliminary Acquisition Consideration for Knoll, Inc. | Consideration Type | Value (in millions) | | :--- | :--- | | Cash Consideration | $543.9 | | Knoll Preferred Stock | $254.4 | | Settlement of Knoll's debt | $376.9 | | Share Consideration (15,843,921 shares) | $688.3 | | Replacement Share-Based Awards | $22.4 | | Total Preliminary Fair Value | $1,887.3 | Preliminary Fair Value of Net Assets Acquired | (In millions) | Fair Value | | :--- | :--- | | Total assets acquired | $2,634.1 | | Total liabilities assumed | $746.8 | | Net Assets Acquired | $1,887.3 | | Goodwill | $943.7 | - Goodwill of $943.7 million was recorded in the Knoll segment and is primarily attributed to the assembled workforce and anticipated operational synergies. It is not expected to be tax-deductible[40] - From the acquisition date (July 19, 2021) to November 27, 2021, Knoll contributed $492.7 million in revenue and a net loss of $73.3 million to the consolidated results[42][43] Note 14: Short-Term Borrowings and Long-Term Debt The company secured a new credit agreement in July 2021 to finance the Knoll acquisition, significantly increasing total debt - In July 2021, to fund the Knoll acquisition, the company entered into a new credit agreement providing a $725 million revolving credit facility, a $400 million Term Loan A, and a $625 million Term Loan B[90] Total Debt Comparison | (In millions) | November 27, 2021 | May 29, 2021 | | :--- | :--- | :--- | | Total debt | $1,391.2 | $277.1 | Note 16: Operating Segments Effective May 30, 2021, the company reorganized its reportable segments to include Americas Contract, International Contract, Global Retail, and Knoll - The company's reportable segments now consist of Americas Contract, International Contract, Global Retail, and Knoll. Corporate expenses are reported separately[97][101] Segment Net Sales and Operating Earnings (Loss) for Three Months Ended Nov 27, 2021 | (In millions) | Net Sales | Operating Earnings (Loss) | | :--- | :--- | :--- | | Americas Contract | $361.5 | $6.3 | | International Contract | $125.1 | $15.2 | | Global Retail | $210.0 | $23.2 | | Knoll | $336.3 | $(20.6) | | Corporate | - | $(20.3) | | Total | $1,026.3 | $3.8 | Note 17: Restructuring and Integration Expense Following the Knoll merger, the company initiated a multi-year integration program with expected pre-tax costs up to $100 million - The Knoll Integration program is expected to result in pre-tax costs not to exceed approximately $100 million[106] - For the six months ended November 27, 2021, the company incurred $95.8 million of costs related to the Knoll Integration. This includes $46.4 million in severance, $15.5 million in asset impairments, $13.4 million in debt-extinguishment costs, and $20.5 million in other integration costs[106] Condensed Consolidated Statements of Comprehensive Income (Loss) Highlights | (Dollars in millions) | Three Months Ended Nov 27, 2021 | Three Months Ended Nov 28, 2020 | Six Months Ended Nov 27, 2021 | Six Months Ended Nov 28, 2020 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $1,026.3 | $626.3 | $1,816.0 | $1,253.0 | | Gross margin | $350.6 | $244.2 | $628.1 | $494.2 | | Operating earnings (loss) | $3.8 | $71.0 | $(49.0) | $166.4 | | Net earnings (loss) attributable to MillerKnoll, Inc. | $(3.4) | $51.3 | $(64.9) | $124.2 | | Diluted earnings (loss) per share | $(0.05) | $0.87 | $(0.92) | $2.10 | Condensed Consolidated Balance Sheets Highlights | (Dollars in millions) | November 27, 2021 | May 29, 2021 | | :--- | :--- | :--- | | Total current assets | $1,214.6 | $891.5 | | Total Assets | $4,465.9 | $2,061.9 | | Total current liabilities | $857.3 | $500.8 | | Total Liabilities | $2,960.1 | $1,135.3 | | Total Stockholders' Equity | $1,436.4 | $849.6 | Condensed Consolidated Statements of Cash Flows Highlights | (Dollars in millions) | Six Months Ended Nov 27, 2021 | Six Months Ended Nov 28, 2020 | | :--- | :--- | :--- | | Net Cash (Used in) Provided by Operating Activities | $(57.6) | $214.6 | | Net Cash Used in Investing Activities | $(1,133.8) | $(24.4) | | Net Cash Provided by (Used in) Financing Activities | $1,035.5 | $(276.9) | | Net Decrease in Cash and Cash Equivalents | $(169.1) | $(76.1) | Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 FY2022 financial results, highlighting increased sales due to the Knoll acquisition, declining gross margin, and integration costs Business Overview Q2 FY2022 net sales increased significantly due to the Knoll acquisition, while gross margin declined due to cost pressures and integration expenses - Net sales increased 63.9% to $1,026.3 million, while organic sales (excluding Knoll and currency effects) grew 11.1% compared to the prior year's quarter[122] - Gross margin decreased to 34.2% from 39.0% YoY, driven by commodity cost pressures, rising labor and freight expenses, and a $4.8 million negative impact from Knoll purchase accounting[122] Q2 FY2022 Earnings Per Share | Metric | Q2 FY2022 | Q2 FY2021 | % Change | | :--- | :--- | :--- | :--- | | Diluted (Loss) EPS | $(0.05) | $0.87 | (105.7)% | | Adjusted Diluted EPS* | $0.51 | $0.89 | (42.7)% | Analysis of Results for Three and Six Months Q2 FY2022 net sales rose by $400 million, primarily from the Knoll acquisition, while gross margin and operating expenses were impacted by costs - The $400 million YoY increase in Q2 net sales was primarily driven by a $330 million contribution from the Knoll acquisition, with the remainder from organic growth across other segments[146] - Q2 gross margin was negatively impacted by approximately 330 basis points from commodity/freight costs, 70 basis points from increased labor costs, and 50 basis points from Knoll purchase accounting amortization[147][148] - The $173.6 million increase in Q2 operating expenses included $99 million from Knoll's ongoing operations, $41 million in acquisition/integration charges, and $11 million in amortization of purchased intangibles[150] Operating Segment Results Q2 FY2022 segment performance varied, with Americas Contract and Global Retail facing margin pressures, while International Contract showed strong growth, and Knoll reported an operating loss - Americas Contract: Q2 organic sales grew 3.9%, but operating earnings fell from $39.1 million to $6.3 million due to a 760 basis point drop in gross margin from cost pressures[158][159] - International Contract: Q2 organic sales grew 23.2%, and operating earnings increased from $12.9 million to $15.2 million, driven by strong sales volume across all geographies[160][161] - Global Retail: Q2 organic sales grew 18.3%, but operating earnings decreased from $29.3 million to $23.2 million due to a 420 basis point drop in gross margin (freight costs) and higher operating expenses[162][163] - Knoll: For Q2, the segment recorded $336.3 million in sales and an operating loss of $(20.6) million, which includes $27 million in integration costs and $16 million in amortization of acquisition-related intangibles[164][165] Liquidity and Capital Resources Cash used in operations significantly increased for the six months ended November 27, 2021, primarily due to the Knoll acquisition and working capital changes Total Liquidity Position | (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 | - Cash used in investing activities for the six months was $1,133.8 million, primarily due to the $1,088.5 million net cash outflow for the Knoll acquisition[173] - Cash provided by financing activities was $1,035.5 million, driven by net debt proceeds of $1,007.0 million and credit facility proceeds of $587.5 million to finance the Knoll acquisition[175] Item 3: Quantitative and Qualitative Disclosures About Market Risk No material changes to market risk disclosures were reported, with key risks remaining interest rates, commodity prices, and foreign exchange rates - There have been no material changes to market risk disclosures since the last Form 10-K. Key risks remain interest rates, commodity prices, and foreign exchange[193] - The principal foreign currencies in which the Company conducts business include the British pound sterling, euro, Canadian dollar, Japanese yen, Mexican peso, Hong Kong dollar, Chinese renminbi, and the Danish krone[195] Item 4: Controls and Procedures Management concluded disclosure controls were effective as of November 27, 2021, with Knoll's internal controls currently undergoing integration - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of November 27, 2021[196] - The company is in the process of integrating Knoll's internal controls over financial reporting, which is the only significant change to internal controls during the quarter[197] Part II — Other Information Item 1: Legal Proceedings There have been no material changes in legal proceedings since the last Annual Report on Form 10-K - There have been no material changes in legal proceedings since the last Annual Report on Form 10-K[199] Item 1A: Risk Factors An updated risk factor highlights the negative impact of a continued shortage of qualified labor on the company's business and earnings - An updated risk factor was added concerning the negative impact of a continued shortage of qualified labor on the company's business, production, and earnings[201] Item 2: Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 84,106 shares during Q2 FY2022 under its $250 million authorization plan, with $222.3 million remaining Share Repurchase Activity for Q2 FY2022 | Period | Total Shares Purchased | Average Price Paid per Share | Maximum Dollar Value Remaining (in millions) | | :--- | :--- | :--- | :--- | | 8/29/21-9/25/21 | 25,588 | $42.34 | $224.6 | | 9/26/21-10/30/21 | 18,455 | $39.23 | $223.9 | | 10/31/21-11/27/21 | 40,063 | $38.57 | $222.3 | | Total | 84,106 | - | - | Item 6: Exhibits This section lists exhibits filed with the Form 10-Q report, including corporate governance documents and Sarbanes-Oxley certifications - Exhibits filed include corporate governance documents (Articles of Incorporation, Bylaws), a compensatory plan, and Sarbanes-Oxley certifications[206]