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 28, 2022 . 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 in over 100 countries primarily through independent contract furniture dealers, direct customer sales, owned and independent retailers, direct-mail catalogs, and the Company's eCommerce platforms. The following is a summary of results for the three months endedDecember 3, 2022 : •Net sales were$1,066.9 million and orders were$1,013.4 million , representing an increase of 4.0% and a decrease of 12.5%, respectively, when compared to the same quarter of the prior year. On an organic basis, which excludes the impact of foreign currency translation and the divesting of an owned dealership in the prior year, net sales were$1,100.7 million (*) and orders were$1,047.5 million , representing an increase of 7.6% and decrease of 9.2%, respectively, when compared to the same quarter of the prior year. •Gross margin was 34.5% as compared to 34.4% for the same quarter of the prior year. The increase in gross margin was driven primarily by price increases, net of incremental discounting as well as the margin impact of Knoll purchase accounting amortization that occurred in the prior year, offset in part by higher commodity costs and increased inventory storage and handling costs within the Global Retail segment. •Operating expenses decreased by$17.9 million or 5.2% as compared to the same quarter of the prior year. The decrease was driven by a decrease of approximately$42 million in integration and amortization expenses related to the acquisition of Knoll. This decrease was offset in part by restructuring expense of$14.7 million in the current period, increased marketing and selling expenses of approximately$3 million and increases in compensation and benefit costs of approximately$7 million . •The integration of the Knoll acquisition continues to progress as planned. At the close of the second quarter, we had implemented approximately$101 million in annualized run rate savings, and have increased the targeted run-rate cost synergies from$120 million to$140 million within three years of the Knoll acquisition. •The effective tax rate was 19.8% compared to 77.6% for the same quarter of the prior year. The year over year change in the effective tax rate for the three months endedDecember 3, 2022 resulted from the year over year change in pre-tax book income as well as the year over year change in forecasted full year pre-tax income. The rate in the second quarter of fiscal 2023 was also impacted by favorable foreign tax credits inthe United States . •Diluted earnings per share was$0.21 as compared to a loss per share of$0.02 in the prior year. Excluding integration related costs, restructuring costs, and the amortization of intangible assets purchased as part of the Knoll acquisition, adjusted diluted earnings per share was$0.46 (*), a 14.8%(*) 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's financial performance is sensitive to changes in certain input costs, including steel and steel component parts. Ongoing cost reduction initiatives and price increase actions have been implemented to help offset these cost pressures, and the benefit from these initiatives is expected to increase over time.
•During the quarter the Company has continued to experience the impact of economic uncertainty in many of the geographies and markets in which we operate. The Company believes that our second quarter financial results reflect
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how our diversified business model, with brands across multiple channels, customer segments and geographies, provides risk diversification and opportunities for future growth.
•The Americas Contract segment in the second quarter reported net sales totaling$529.7 million , up 6.1% compared to the prior year period on a reported basis and up 7.3% organically. Americas Contract had new orders of$474.1 million , which was a decrease of 17.3% from the prior year, and down 16.2% on an organic basis. The decline in orders year-over-year reflected the impact of pandemic-driven pent-up demand in the prior year period, compounded by a challenging macro-economic environment and many customers opting to pilot smaller projects as part of their return to office efforts following the extended impacts of COVID on office utilization rates. •The International Contract & Specialty segment delivered net sales in the second quarter of$264.9 million , an increase of 7.2% from the year-ago period on a reported basis and up 15.4% organically. New orders in this segment totaled$241.7 million , representing a year-over-year decrease of 7.4% on a reported basis and an increase of 0.1% organically. During the quarter, lower demand levels inChina ,France andIreland were partially offset by growth inIndia ,South Korea and theMiddle East . Additionally, lower order demand forHolly Hunt was offset by growth in the textile brands and Spinneybeck Filzfelt. •Net sales in the second quarter for our Global Retail segment totaled$272.3 million , a decline of 2.8% over the same quarter last year on a reported basis and up 1.2% organically. New orders in the quarter totaled$297.6 million , down 8.1% compared to the same period last year on a reported basis and down 4.4% organically. Investments in digital capabilities, reliability and strategic marketing promotion helped bolster sales during the quarter. The Company's fiscal year is the 52 or 53 week period ending on the Saturday closest toMay 31 . The fiscal year endedMay 28, 2022 ("fiscal 2022") was a 52 week period while the fiscal year endingJune 3, 2023 ("fiscal 2023") will be a 53 week period. The first six months of fiscal 2022 contained 26 weeks, and the six months of fiscal 2023 contained 27 weeks. This is a factor that should be considered when comparing the Company's year to date financial results to the prior year period.
The remaining sections within Item 2 include additional analysis of the three
and six months ended
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 report include: Adjusted Earnings per Share and Organic Growth (Decline).
Adjusted Earnings per Share represents reported diluted earnings per share excluding the impact from amortization of purchased intangibles, acquisition and integration charges, debt extinguishment charges, restructuring charges, other special charges or gains and the related tax effect of those adjustments. These adjustments are described further below.
Organic Growth (Decline) represents the change in sales and orders, excluding currency translation effects and the impact of acquisitions and divestitures.
The adjustments made to arrive at these non-GAAP financial measures are as follows:
•Amortization of Purchased Intangibles: Includes expenses associated with the
amortization of inventory step-up 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
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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. •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 expenses related to other cost reduction efforts or reorganization initiatives.
•Debt Extinguishment Charges: Includes expenses associated with the extinguishment 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 charges: Includes actions involving targeted workforce reductions.
•Special charges: Include certain costs arising as a direct result of COVID-19 pandemic.
•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.
The following tables reconcile net sales to organic net sales for the periods
ended as indicated below:
Three Months Ended
December 3, 2022
Americas International & Retail Total
Specialty
Net Sales, as reported $ 529.7 $ 264.9 $ 272.3 $ 1,066.9
% change from PY 6.1 % 7.2 % (2.8) % 4.0 %
Adjustments
Currency Translation Effects (1) 2.7 20.1 11.0 33.8
Net Sales, organic $ 532.4 $ 285.0 $ 283.3 $ 1,100.7
% change from PY 7.3 % 15.4 % 1.2 % 7.6 %
Three Months Ended
November 27, 2021
Americas International & Retail Total
Specialty
Net Sales, as reported $ 499.3 $ 247.0 $ 280.0 $ 1,026.3
Adjustments
Dealer Divestitures (3.1) - - (3.1)
Net sales, organic $ 496.2 $ 247.0 $ 280.0 $ 1,023.2
(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
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Six Months Ended
December 3, 2022
Americas International & Retail Total
Specialty
Net Sales, as reported $ 1,067.1 $ 537.4 $ 541.2 $ 2,145.7
% change from PY 21.2 % 29.8 % 3.8 % 18.2 %
Adjustments
Acquisitions (77.2) (55.5) (31.1) (163.8)
Currency Translation Effects (1) 4.1 31.9 19.3 55.3
Impact of Extra Week in FY23 (27.4) (11.6) (13.7) (52.7)
Net Sales, organic $ 966.6 $ 502.2 $ 515.7 $ 1,984.5
% change from PY 10.5 % 21.3 % (1.1) % 9.6 %
Six Months Ended
November 27, 2021
Americas International & Retail Total
Specialty
Net Sales, as reported $ 880.6 $ 414.1 $ 521.3 $ 1,816.0
Adjustments
Dealer Divestitures (6.0) - - (6.0)
Net sales, organic $ 874.6 $ 414.1 $ 521.3 $ 1,810.0
(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
The following tables reconcile orders as reported to organic orders for the periods ended as indicated below:
Three Months Ended
December 3, 2022
Americas International Retail Total
and Specialty
Orders, as reported $ 474.1 $ 241.7 $ 297.6 $ 1,013.4
% change from PY (17.3) % (7.4) % (8.1) % (12.5) %
Adjustments
Currency Translation Effects (1) 2.5 19.7 11.9 34.1
Orders, organic $ 476.6 $ 261.4 $ 309.5 $ 1,047.5
% change from PY (16.2) % 0.1 % (4.4) % (9.2) %
Three Months Ended
November 27, 2021
Americas International Retail Total
and Specialty
Orders, as reported $ 573.1 $ 261.1 $ 323.7 $ 1,157.9
Adjustments
Dealer Divestitures (4.7) - - (4.7)
Orders, organic $ 568.4 $ 261.1 $ 323.7 $ 1,153.2
(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.
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Six Months Ended
December 3, 2022
Americas International Retail Total
and Specialty
Orders, as reported $ 985.4 $ 494.1 $ 547.0 $ 2,026.5
% change from PY (7.8) % 8.8 % (0.9) % (2.3) %
Adjustments
Acquisition (80.3) (57.5) (32.2) (170.0)
Currency Translation Effects (1) 3.4 29.5 17.8 50.7
Impact of Extra Week in FY23 (24.0) (10.3) (12.4) (46.7)
Orders, organic $ 884.5 $ 455.8 $ 520.2 $ 1,860.5
% change from PY (16.6) % 0.4 % (5.7) % (10.0) %
Six Months Ended
November 27, 2021
Americas International Retail Total
and Specialty
Orders, as reported $ 1,068.5 $ 454.1 $ 551.8 $ 2,074.4
Adjustments
Dealer Divestitures (7.6) - - (7.6)
Orders, organic $ 1,060.9 $ 454.1 $ 551.8 $ 2,066.8
(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.
The following table reconciles earnings per share - diluted to adjusted earnings per share - diluted for the periods ended as indicated below:
Three Months Ended Six Months Ended
December 3, 2022
(0.02) $ 0.55 $ (0.94)
Non-comparable items:
Add: Amortization of purchased intangibles 0.08 0.21 0.16 0.70 Add: Acquisition and integration charges 0.06 0.55 0.12 1.55 Add: Restructuring charges 0.19 - 0.20 - Add: Special charges - - - (0.01) Add: Debt extinguishment - - - 0.19 Tax impact on adjustments (0.08) (0.20) (0.13) (0.51)
Adjusted Earnings per Share - Diluted
0.54 $ 0.90 $ 0.98
Weighted Average Shares Outstanding (used
for Calculating Adjusted Earnings per Share)
- Diluted 75,878,078 75,304,752 76,042,640 70,803,483
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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
December 3, November 27, December 3, November 27,
(In millions, except share data) 2022 2021 % Change 2022 2021 % Change
Net sales $ 1,066.9 $ 1,026.3 4.0 % $ 2,145.7 $ 1,816.0 18.2 %
Cost of sales 699.3 673.3 3.9 % 1,406.0 1,185.3 18.6 %
Gross margin 367.6 353.0 4.1 % 739.7 630.7 17.3 %
Operating expenses 328.9 346.8 (5.2) % 650.2 677.1 (4.0) %
Operating earnings (loss) 38.7 6.2 524.2 % 89.5 (46.4) 292.9 %
Other expenses, net 17.1 8.2 108.5 % 34.2 26.1 31.0 %
Earnings (loss) before income
taxes and equity income 21.6 (2.0) 1,180.0 % 55.3 (72.5) 176.3 %
Income tax expense (benefit) 4.3 (2.7) 259.3 % 10.6 (13.3) 179.7 %
Equity income from nonconsolidated
affiliates, net of tax 0.2 (0.1) 300.0 % 0.2 - - %
Net earnings (loss) 17.5 0.6 2,816.7 % 44.9 (59.2) 175.8 %
Net earnings attributable to
redeemable noncontrolling
interests 1.5 2.3 n/a 3.1 3.9 n/a
Net earnings (loss) attributable to MillerKnoll, Inc.$ 16.0 $ (1.7) 1,041.2 %$ 41.8 $ (63.1) 166.2 %
Earnings (loss) per share - basic
1,150.0 %$ 0.55 $ (0.94) 158.5 % Orders$ 1,013.4 $ 1,157.9 (12.5) %$ 2,026.5 $ 2,074.4 (2.3) % Backlog$ 815.4 $ 967.3 (15.7) %
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
December 3, 2022 November 27, 2021 December 3, 2022 November 27, 2021
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 65.5 65.6 65.5 65.3
Gross margin 34.5 34.4 34.5 34.7
Operating expenses 30.8 33.8 30.3 37.3
Operating earnings (loss) 3.6 0.6 4.2 (2.6)
Other expenses, net 1.6 0.8 1.6 1.4
Earnings (loss) before income taxes and
equity income 2.0 (0.2) 2.6 (4.0)
Income tax expense (benefit) 0.4 (0.3) 0.5 (0.7)
Equity income from nonconsolidated
affiliates, net of tax - - - -
Net earnings (loss) 1.6 0.1 2.1 (3.3)
Net earnings attributable to redeemable
noncontrolling interests 0.1 0.2 0.1 0.2
Net earnings (loss) attributable to
MillerKnoll, Inc. 1.5 (0.2) 1.9 (3.5)
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The following charts present graphically the primary drivers of the
year-over-year change in net sales for the three and six months ended
[[Image Removed: mlkn-20221203_g1.jpg]] [[Image Removed: mlkn-20221203_g2.jpg]] Net sales increased$41 million or 4.0% in the second quarter of fiscal 2023 compared to the second quarter of fiscal 2022. The following items contributed to the change:
•Incremental price increases, net of price discounting drove an increase in net
sales of approximately
•Increased sales volumes within the International Contract & Specialty segment contributed to sales growth in the quarter by approximately$23 million . The growth was driven, in part, by a strong backlog of orders coming into the second quarter.
•Decreased sales volume within the
•Foreign currency translation decreased net sales by approximately
Net sales increased$330 million or 18.2% in the first six months of fiscal 2023 compared to the first six months of fiscal 2022. The following items contributed to the change:
•Increase of
•Incremental price increases, net of price discounting drove an increase in net
sales of approximately
•Increased sales volumes within the International Contract & Specialty segment contributed to sales growth in the quarter by approximately$77 million . The International Contract & Specialty segment's growth was driven, in part, by a strong backlog of orders in the first half of the year.
•The additional week during the first quarter of the current year contributed to
approximately
•Decreased sales volume within the
•Foreign currency translation decreased net sales by approximately
Gross Margin
Gross margin was 34.5% in the second quarter of fiscal 2023 as compared to 34.4%
in the second quarter of fiscal 2022. The following factors summarize the major
drivers of the year-over-year change in gross margin percentage:
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•Price increases, net of incremental discounting, contributed to margin improvement of approximately 350 basis points.
•The impact of amortization of purchased intangibles related to the Knoll acquisition recorded in the prior year that did not occur in the current period had a favorable impact on gross margin of approximately 40 basis points. These factors were offset in part by the following factors;
•Cost pressures from commodities, storage and handling costs, freight and product distribution costs, which decreased gross margin by approximately 250 basis points.
•Increased labor and overhead costs had a negative impact on margin of approximately 60 basis points.
•Unfavorable product and channel mix as compared to the prior year also had a negative impact on gross margin.
Gross margin was 34.5% in the six months ended
•Cost pressures from commodities, storage and handling costs, freight and product distribution costs decreased gross margin by approximately 320 basis points.
•Increased labor costs had a negative impact on margin of approximately 60 basis points. These factors were offset in part by the following factors;
•The positive impact of price increases, net of incremental discount, offset some of these pressures by approximately 340 basis points.
•The impact of amortization of purchased intangibles related to the Knoll acquisition recorded in the prior year that did not occur in the current period had a favorable impact on gross margin of approximately 50 basis points.
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 endedDecember 3, 2022 . The amounts presented in the graphs are expressed in millions and have been rounded. [[Image Removed: mlkn-20221203_g3.jpg]]
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[[Image Removed: mlkn-20221203_g4.jpg]]
Operating expenses decreased by $18 million or 5.2% in the second quarter of
fiscal 2023 compared to the prior year period. The following factors contributed
to the change:
•Restructuring expenses increased by approximately
•Compensation and benefit costs increased approximately$7 million , driven by increases in variable-based compensation and incentives as well as increased benefit costs related to the harmonization of benefits across the organization.
•Increased marketing costs of approximately
•An increase of approximately
•Acquisition related integration and amortization expense decreased
•Favorable foreign currency translation of approximately
Operating expenses decreased by
•The consolidation of Knoll results for the entirety of the first quarter of
fiscal 2023 increased operating expenses by
•Restructuring expenses increased by approximately
•Compensation and benefit costs increased approximately$14 million , driven by increases in variable-based compensation and incentives as well as increased benefit costs related to the harmonization of benefits across the organization.
•The impact of an extra week in the first quarter of fiscal 2023 increased
operating expenses by approximately
•Acquisition related integration and amortization expense decreased
•Favorable foreign currency translation of approximately
•The remaining change was primarily due to investments in technology and digital
tools primarily across the
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Other Income/Expense
During the three months endedDecember 3, 2022 , net other expense was$17.1 million , representing an unfavorable change of$8.9 million compared to the same period in the prior year. Other income/expense in the three months endedDecember 3, 2022 included$9.1 million of higher interest expense resulting from higher levels of debt and increased interest rates as compared to the same period of the prior year. During the six months endedDecember 3, 2022 , net other expense was$34.2 million , representing an unfavorable change of$8.1 million compared to the same period in the prior year. Other income/expense in the six months endedNovember 27, 2021 included a loss on extinguishment of debt of approximately$13.4 million , which represented the premium on early debt redemption. This was offset by$20.2 million of higher interest expense during the current year resulting from higher levels of debt as well as increases in interest expense.
Income Taxes
See Note 10 of the Condensed Consolidated Financial Statements for additional
information.
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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 & Specialty, and Global Retail. Unallocated expenses are reported within the Corporate category. For descriptions of each segment, refer to Note 15 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 endedDecember 3, 2022 . 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-20221203_g5.jpg]][[Image Removed: mlkn-20221203_g6.jpg]][[Image Removed: mlkn-20221203_g7.jpg]][[Image Removed: mlkn-20221203_g8.jpg]]
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Americas Contract
Three Months Ended Six Months Ended
November 27, November 27,
(Dollars in millions) December 3, 2022 2021 Change December 3, 2022 2021 Change
Net sales $ 529.7 $ 499.3 $ 30.4 $ 1,067.1 $ 880.6 $ 186.5
Gross margin 158.7 128.4 30.3 302.9 234.6 68.3
Gross margin % 30.0 % 25.7 % 4.3 % 28.4 % 26.6 % 1.8 %
Operating earnings 25.3 (10.9) 36.2 45.7 (21.5) 67.2
Operating earnings % 4.8 % (2.2) % 7.0 % 4.3 % (2.4) % 6.7 %
For the three month comparative period, net sales increased 6.1%, or 7.3%(*) on an organic basis, over the prior year period due to:
•Price increases, net of incremental discounting of
•Decreased sales volumes within the segment of approximately$12 million , which were driven by challenging macro-economic conditions as well as the year-over-year impact of higher shipments in the prior year related to pent-up demand after the COVID-19 pandemic; as well as unfavorable foreign currency translation of approximately$3 million .
For the six month comparative period, Net sales increased 21.2%, or 10.5%(*) on an organic basis, over the prior year period due to:
•An increase in sales of$74 million due to the Knoll acquisition that was completed onJuly 19, 2021 . The increase represents the impact of consolidating Knoll results for the entirety of the first quarter of fiscal 2023.
•Price increases, net of incremental discounting of
•An increase of approximately
•Decreased sales volumes within the segment of approximately$6 million , which were driven by challenging macro-economic conditions as well as the year-over-year impact of higher shipments in the prior year related to pent-up demand after the COVID-19 pandemic; as well as unfavorable foreign currency translation of approximately$4 million .
(*) Non-GAAP measurements; see accompanying reconciliations and explanations under the heading "Reconciliation of Non-GAAP Financial Measures."
For the three month comparative period, operating earnings increased
•Increased gross margin of$30 million due to the increase in net sales described above, as well as increased gross margin percentage of 430 basis points. The increase in gross margin percentage was due primarily to the impact of price increase actions taken in the prior year as well as from the impact of amortization of purchased intangibles related to the Knoll acquisition recorded in the prior year that did not occur in the current period, offset in part by higher commodity and labor costs. •Decreased operating expenses of$6 million driven primarily a decrease in acquisition related integration and amortization expense of$17 million from the prior year period. These decreases in operating expenses were offset in part by increased restructuring expenses of approximately$13 million related to voluntary and involuntary reductions in the Company's workforces as well as increased compensation and benefit costs of$1 million due to increases in variable-based compensation.
For the six month comparative period, Operating earnings increased
•Increased Gross margin of$68.3 million due to the increase in net sales described above, as well as increased gross margin percentage of 180 basis points due primarily to incremental list price increases, net of contract price discounting, as well as from the impact of amortization of purchased intangibles related to the Knoll acquisition recorded in the prior year that did not occur in the current period, offset in part by higher commodity and labor costs. •Increased Operating expenses of$1.1 million . The following factors contributed to the change: 35
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•An increase of approximately
•An increase of approximately
•Increased restructuring expenses of approximately
International Contract & Specialty
Three Months Ended Six Months Ended
November 27, November 27,
(Dollars in millions) December 3, 2022 2021 Change December 3, 2022 2021 Change
Net sales $ 264.9 $ 247.0 $ 17.9 $ 537.4 $ 414.1 $ 123.3
Gross margin 109.0 98.5 10.5 222.4 165.7 56.7
Gross margin % 41.1 % 39.9 % 1.2 % 41.4 % 40.0 % 1.4 %
Operating earnings 28.3 14.8 13.5 56.2 21.4 34.8
Operating earnings % 10.7 % 6.0 % 4.7 % 10.5 % 5.2 % 5.3 %
For the three month comparative period, net sales increased 7.2%, or 15.4%(*) on an organic basis, over the prior year period due to:
•Increased sales volume of approximately$23 million , driven by robust return to office plans within many international markets, continued growth within theIndia ,South Korea andMiddle East markets, and strength within the Holly Hunt and Spinneybeck Filzfelt businesses; and
•Price increases, net of incremental discounting of
•Unfavorable foreign currency translation of approximately
For the six month comparative period, Net sales increased 29.8%, or 21.3%(*) on an organic basis, over the prior year period due to:
•Increased sales volume of approximately
•An increase in sales of$56 million due to the Knoll acquisition that was completed onJuly 19, 2021 . The increase represents the impact of consolidating Knoll results for the entirety of the first quarter of fiscal 2023;
•The positive impact of the additional sales from the additional week in the
first quarter of
•Price increases, net of incremental discounting of
•Unfavorable foreign currency translation of approximately
(*) Non-GAAP measurements; see accompanying reconciliations and explanations under the heading "Reconciliation of Non-GAAP Financial Measures."
For the three month comparative period, Operating earnings increased
•Increased Gross margin of$11 million due to the increase in sales explained above, as well as the increased gross margin percentage of 120 basis points due primarily to the leverage of fixed costs on higher sales volume as well as from the impact of amortization of purchased intangibles related to the Knoll acquisition recorded in the prior year that did not occur in the current period. •Decreased operating expenses of approximately$3 million driven primarily by decreased amortization and acquisition related integration changes of approximately$5 million , as well as favorable foreign currency exchange impacts of approximately$3 million , offset in part by increased compensation, variable-incentive and benefit costs.
For the six month comparative period, Operating earnings increased
•Increased Gross margin of$56.7 million due to the increase in sales explained above, and increased gross margin percentage of 140 basis points due primarily to the leverage of fixed costs on higher sales volume as well as from the
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impact of amortization of purchased intangibles related to the Knoll acquisition recorded in the prior year that did not occur in the current period.
•Increased Operating expenses of$21.9 million driven primarily from consolidating Knoll results for the entirety of the first quarter of fiscal 2023, the impact of the additional week in the current period as compared to the prior year, and increased compensation and benefit costs, partially offset by the impact of foreign currency translation as well as lower amortization and acquisition related integration charges as compared to the same period of the prior year. Global Retail Three Months Ended Six Months Ended November 27, November 27, (Dollars in millions) December 3, 2022 2021 Change December 3, 2022 2021 Change Net sales$ 272.3 $ 280.0 $ (7.7) $ 541.2 $ 521.3 $ 19.9 Gross margin 99.9 126.1 (26.2) 214.4 230.4 (16.0) Gross margin % 36.7 % 45.0 % (8.3) % 39.6 % 44.2 % (4.6) % Operating earnings 2.0 34.4 (32.4) 19.8 60.8 (41.0) Operating earnings % 0.7 % 12.3 % (11.6) % 3.7 % 11.7 % (8.0) %
For the three month comparative period, Net sales decreased 2.8%, and increased 1.2%(*) on an organic basis, over the prior year period due to:
•Price increases, net of incremental discounting, which increased sales by
•A decrease in sales volume of approximately
•Unfavorable foreign currency translation of approximately
For the six month comparative period, Net sales increased 3.8%, and decreased 1.1%(*) on an organic basis, over the prior year period due to:
•An increase in sales of$31 million due to the Knoll acquisition that was completed onJuly 19, 2021 . The increase represents the impact of consolidating Knoll results for the entirety of the first quarter of fiscal 2023;
•Price increases, net of incremental discounting, which increased sales by
•The positive impact of additional sales from the 14th week in the first quarter
of
•A decrease in sales volume of approximately
•Unfavorable foreign currency translation of approximately
(*) Non-GAAP measurements; see accompanying reconciliations and explanations under the heading "Reconciliation of Non-GAAP Financial Measures."
For the three month comparative period, Operating earnings decreased
•Decreased Gross margin of$26 million due to the decrease in sales explained above, and decreased gross margin percentage of 830 basis points attributable to the unfavorable impact of higher inventory related costs, including storage, freight and distribution as well as unfavorable changes in product mix, partially partially offset in part by the favorable impact of pricing.
•Increased operating expenses of
For the six month comparative period, Operating earnings decreased
•Decreased Gross margin of$16 million driven by the decreased gross margin percentage of 460 basis points attributable to the unfavorable impact of higher commodity and inventory storage costs as well as unfavorable changes in product mix, partially offset in part by the favorable impact of pricing. •Increased Operating expenses of$25 million primarily due to consolidating Knoll results for the entirety of the first quarter of fiscal 2023 and increased marketing and costs associated with the expansion of physical store locations. 37
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Corporate
Corporate unallocated expenses totaled$17 million for the second quarter of fiscal 2023, a decrease of$15 million from the second quarter of fiscal 2022. The decrease was driven by a reduction of integration and transaction costs related to the Knoll acquisition, which were$21 million in the prior period compared to$2 million in the second quarter of fiscal 2023. Corporate unallocated expenses totaled$32.2 million for the first six months of fiscal 2023, a decrease of$74.9 million from the same period of fiscal 2022. The decrease was driven by a reduction of integration and transaction costs related to the Knoll acquisition, which were$107.1 million in the prior period compared to$32.2 million in the second quarter of fiscal 2023.
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) December 3, 2022 November 27, 2021 Cash (used in) provided by: Operating activities $ (5.3) $ (57.6) Investing activities (32.0) (1,133.8) Financing activities 11.6 1,035.5 Effect of exchange rate changes (7.1)
(13.2)
Net change in cash and cash equivalents $ (32.8) $
(169.1)
Cash Flows - Operating Activities
The principal source of our operating cash flow is net earnings, meaning cash receipts from the sale of our products, net of costs to manufacture, distribute, and market our products. Net cash used in operating activities for the six months endedDecember 3, 2022 totaled$5.3 million , as compared to cash used of$57.6 million in the same period of the prior year. The decrease in cash outflow is due primarily to an increase in earnings in the current quarter compared to the same period of the prior year.
Cash Flows - Investing Activities
Cash used in investing activities for the six months endedDecember 3, 2022 was$32.0 million , as compared to$1,133.8 million in the same period of the prior year. The decrease 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 in the prior year period. In the six months endedDecember 3, 2022 , we were advanced$13.5 million of cash against the value of company owned life insurance policies. This is reflected as cash proceeds from investing activities in the Consolidated Statement of Cash Flows. At the end of the second quarter of fiscal 2023, there were outstanding commitments for capital purchases of$17.9 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$90 million and$100 million , which will be primarily related to investments in the Company's facilities and equipment. This compares to full-year capital spending of$94.7 million in fiscal 2022. Capital expenditures through for the first six months of fiscal 2023 of$40.3 million are$6.0 million less than the same period of the prior year.
Cash Flows - Financing Activities
Cash provided from financing activities for the six months endedDecember 3, 2022 was$11.6 million , as compared to cash provided by financing activities of$1,035.5 million in the same period of the prior year. The decrease 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 the prior year. Sources of Liquidity The Company has taken actions to safeguard its cash flow and liquidity position in the current environment. The Company is closely managing spending levels, capital investments, and working capital. The Company maintains an open market share repurchase program under our existing share repurchase authorization and may repurchase shares from time to time based on management's evaluation of market conditions, share price and other factors. 38
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At the end of the second quarter of fiscal 2023, 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 13 to the Condensed Consolidated Financial Statements. (In millions) December 3, 2022 May 28, 2022 Cash and cash equivalents $ 197.5 $ 230.3 Availability under syndicated revolving line of credit 230.9 296.6 Total liquidity $ 428.4 $ 526.9 Of the cash and cash equivalents noted above at the end of the second quarter of fiscal 2023, the Company had$181.6 million of cash and cash equivalents held outsidethe United States . 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 of
The Company intends to repatriate$185.0 million of undistributed foreign earnings of which$104.9 million is held in cash in certain foreign jurisdictions with the remainder recorded in working capital. The Company has recorded a$6.3 million deferred tax liability related to foreign withholding taxes on these future dividends received in theU.S. from foreign subsidiaries. A significant portion of the$185.0 million of undistributed foreign earnings was previously taxed under theU.S. Tax Cut and Jobs Act (TCJA). The Company intends to remain indefinitely reinvested in the remaining undistributed earnings outside theU.S. which is estimated to be approximately$250.2 million onDecember 3, 2022 .
The Company believes cash on hand, cash generated from operations, and borrowing capacity will provide adequate liquidity to fund near term and foreseeable future business operations, capital needs, future dividends and share repurchases, subject to financing availability in the marketplace.
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 28, 2022 was provided in the Company's Annual Report on Form 10-K for the year endedMay 28, 2022 . There have been no material changes in such obligations since that date. Guarantees
See Note 12 to the Condensed Consolidated Financial Statements.
Variable Interest Entities
See Note 17 to the Condensed Consolidated Financial Statements.
Contingencies
See Note 12 to the Condensed Consolidated Financial Statements.
Critical Accounting Policies
The Company strives to report financial results clearly and understandably. The Company follows accounting principles generally accepted inthe 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 endedMay 28, 2022 . New Accounting Standards
See Note 2 to the Condensed Consolidated Financial Statements.
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Cautionary Note Regarding Forward-Looking Statements
This report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements relate to future events and anticipated results of operations, business strategies, the anticipated benefits of our acquisition of Knoll, the anticipated impact of the acquisition on the combined company's business and future financial and operating results, the expected amount and timing of synergies from the Knoll acquisition, and other aspects of our operations or operating results. These forward-looking statements generally can be identified by phrases such as "will," "expects," "anticipates," "foresees," "forecasts," "estimates" or other words or phrases of similar import. It is uncertain whether any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do, what impact they will have on the results of operations and financial condition ofMillerKnoll or the price ofMillerKnoll's stock. These forward-looking statements involve certain risks and uncertainties, many of which are beyondMillerKnoll's control, that could cause actual results to differ materially from those indicated in such forward-looking statements, including but not limited to: general economic conditions; the impact of any company or government policies and actions to protect the health and safety of individuals or government policies or actions to maintain the functioning of national or global economies and market of public health crises, such as pandemics and epidemics; risks related to the additional debt incurred in connection with the Knoll acquisition;MillerKnoll's ability to comply with its debt covenants and obligations; the risk that the anticipated benefits of the Knoll acquisition will be more costly to realize than expected; the effect of the announcement of the Knoll acquisition on the ability ofMillerKnoll to retain and hire key personnel and maintain relationships with customers, suppliers and others with whomMillerKnoll does business, or onMillerKnoll's operating results and business generally; the ability to successfully integrate Knoll's operations; the ability ofMillerKnoll to implement its plans, forecasts and other expectations with respect toMillerKnoll's business after the completion of the Knoll acquisition and realize expected synergies; business disruption following the Knoll acquisition; the availability and pricing of raw materials; the financial strength of our dealers and the financial strength of our customers; the success of newly-introduced products; the pace and level of government procurement; and the outcome of pending litigation or governmental audits or investigations. For additional information about other factors that could cause actual results to differ materially from those described in the forward-looking statements, please refer toMillerKnoll's periodic reports and other filings with theSEC , including the risk factors identified in our Annual Report on Form 10-K for the year endedMay 28, 2022 . The forward-looking statements included in this report are made only as of the date hereof.MillerKnoll does not undertake any obligation to update any forward-looking statements to reflect subsequent events or circumstances, except as required by law.
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