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 interior furnishings for use in various environments including office, healthcare, educational, and residential settings and provides related services that support companies all over the world. The Company's products are sold through independent contract office furniture dealers, retail studios, the Company's eCommerce platforms, direct mail catalogs, as well as direct customer sales and independent retailers. The following is a summary of results for the three months endedMarch 4, 2023 : •Net sales were$984.7 million and orders were$885.4 million , representing an decrease of 4.4% and a decrease of 19.2%, 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$1,000.6 million (*) and orders were$899.7 million , representing an decrease of 2.7% and decrease of 17.6%, respectively, when compared to the same quarter of the prior year. •Gross margin was 34.1% as compared to 33.0% for the same quarter of the prior year. The increase in Gross margin was driven primarily by the impact of recently implemented price increase actions and the realization of synergies associated with the Knoll integration. These benefits more than offset impairment costs recorded as part of a decision to cease operating Fully as a stand-alone brand as well as higher commodity, transportation and logistics costs as compared to the prior year. •Operating expenses increased by$4.1 million or 1.3% as compared to the same quarter of the prior year. The increase was driven primarily by impairment expenses recorded in the third quarter of the current year related to the decision to cease operating Fully as a stand-alone brand, offset in part by lower variable compensation, and the realization of cost synergies as a result of optimization of our organizational structure. •As of the end of the third quarter, the Company has captured$123 million in annualized run rate synergies following the close of the Knoll acquisition in the first quarter of Fiscal 2022. The Company continues to make further progress towards our target of$140 million in synergies by the end of the third year following the acquisition. •The effective tax rate was 31.2% compared to 15.6% for the same quarter of the prior year. The year over year change in the effective tax rate for the three months endedMarch 4, 2023 resulted from an unfavorable tax adjustment in the current quarter related to stock compensation. Additionally, the effective tax rate in the prior year third quarter was reduced by favorable tax adjustments related to the acquisition of Knoll and restructuring activities, which did not re-occur in the third quarter endedMarch 4, 2023 . •Diluted earnings per share was$0.01 as compared to earnings per share of$0.19 in the prior year. Excluding integration related costs, restructuring costs, impairments related to the Fully decision and the amortization of intangible assets purchased as part of the Knoll acquisition, adjusted diluted earnings per share was$0.54 (*), a 74.2%(*) increase 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:
•During the quarter the Company continued to experience the impact of economic
uncertainty in many of the geographies and markets in which we operate. The
Company believes that our third quarter financial results reflect how our
diversified business model, with brands across multiple channels, customer
segments and geographies, provides risk diversification and opportunities for
future growth.
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•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.
•The Americas Contract segment in the third quarter reported Net sales totaling$484.6 million , down 4.9% compared to the prior year period on a reported basis and down 4.5% organically. Americas Contract had new orders of$461.6 million , which was a decrease of 12.6% from the prior year, and down 11.8% on an organic basis. The decline in orders year-over-year reflect the impact of a challenging macro-economic environment compounded by pandemic-driven pent-up demand in the same period of the prior year. •The International Contract & Specialty segment delivered Net sales in the third quarter of$242.5 million , an increase of 0.6% from the year-ago period on a reported basis and up 4.3% organically. New orders in this segment totaled$210.1 million , representing a year-over-year decrease of 27.2% on a reported basis and a decrease of 24.5% organically. The year over year decline in orders as driven primarily by the cycling of record post-pandemic activity in the same quarter of the prior year. •Net sales in the third quarter for the Global Retail segment totaled$257.6 million , a decrease of 7.7% over the same quarter last year on a reported basis and a decrease of 5.5% organically. Orders in the quarter totaled$213.7 million , down 23.5% compared to the same period last year on a reported basis and down 21.3% organically. The decline in year over year orders reflect the impact of a slowdown in the North American housing market and general economic uncertainty. 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 nine months of fiscal 2022 contained 39 weeks, and the first nine months of fiscal 2023 contained 40 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 nine 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, impairment 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, the impact of an additional week in the fiscal 2023 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
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amounts were significantly impacted by the size of the Knoll acquisition. Furthermore, we believe that this adjustment enables better comparison of our results as Amortization of Purchased Intangibles will not recur in future periods once such intangible assets have been fully amortized. Any future acquisitions may result in the amortization of additional intangible assets. Although we exclude the Amortization of Purchased Intangibles in these non-GAAP measures, we believe that it is important for investors to understand that such intangible assets were recorded as part of purchase accounting and contribute to revenue generation. •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.
•Impairment charges: Includes non-cash, pre-tax charges for the impairment of assets associated with the decision to cease operating Fully as a stand-alone brand.
•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 reconciles Net sales to Net sales, organic for the periods
ended as indicated below:
Three Months Ended
March 4, 2023
Americas International & Retail Total
Specialty
Net sales, as reported $ 484.6 $ 242.5 $ 257.6 $ 984.7
% change from PY (4.9) % 0.6 % (7.7) % (4.4) %
Adjustments
Currency translation effects (1) 1.0 8.8 6.1 15.9
Net sales, organic $ 485.6 $ 251.3 $ 263.7 $ 1,000.6
% change from PY (4.5) % 4.3 % (5.5) % (2.7) %
Three Months Ended
February 26, 2022
Americas International & Retail Total
Specialty
Net sales, as reported $ 509.4 $ 241.0 $ 279.1 $ 1,029.5
Adjustments
Dealer divestitures (0.7) - - (0.7)
Net sales, organic $ 508.7 $ 241.0 $ 279.1 $ 1,028.8
(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
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Nine Months Ended
March 4, 2023
Americas International & Retail Total
Specialty
Net sales, as reported $ 1,551.7 $ 779.9 $ 798.8 $ 3,130.4
% change from PY 11.6 % 19.1 % (0.2) % 10.0 %
Adjustments
Acquisitions (77.2) (55.5) (31.1) (163.8)
Currency translation effects (1) 5.0 40.7 25.4 71.1
Impact of extra week in FY23 (27.4) (11.6) (13.7) (52.7)
Net sales, organic $ 1,452.1 $ 753.5 $ 779.4 $ 2,985.0
% change from PY 5.0 % 15.0 % (2.6) % 5.2 %
Nine Months Ended
February 26, 2022
Americas International & Retail Total
Specialty
Net sales, as reported $ 1,390.0 $ 655.1 $ 800.4 $ 2,845.5
Adjustments
Dealer divestitures (6.7) - - (6.7)
Net sales, organic $ 1,383.3 $ 655.1 $ 800.4 $ 2,838.8
(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 tables reconcile orders as reported to organic orders for the periods ended as indicated below:
Three Months Ended
March 4, 2023
Americas International Retail Total
and Specialty
Orders, as reported $ 461.6 $ 210.1 $ 213.7 $ 885.4
% change from PY (12.6) % (27.2) % (23.5) % (19.2) %
Adjustments
Currency translation effects (1) 0.5 7.9 5.9 14.3
Orders, organic $ 462.1 $ 218.0 $ 219.6 $ 899.7
% change from PY (11.8) % (24.5) % (21.3) % (17.6) %
Three Months Ended
February 26, 2022
Americas International Retail Total
and Specialty
Orders, as reported $ 528.0 $ 288.7 $ 279.2 $ 1,095.9
Adjustments
Dealer divestitures (3.8) - - (3.8)
Orders, organic $ 524.2 $ 288.7 $ 279.2 $ 1,092.1
(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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Nine Months Ended
March 4, 2023
Americas International Retail Total
and Specialty
Orders, as reported $ 1,447.0 $ 704.2 $ 760.7 $ 2,911.9
% change from PY (9.4) % (5.2) % (8.4) % (8.1) %
Adjustments
Acquisition (80.3) (57.5) (32.3) (170.1)
Currency translation effects (1) 3.8 37.5 23.6 64.9
Impact of extra week in FY23 (24.0) (10.3) (12.4) (46.7)
Orders, organic $ 1,346.5 $ 673.9 $ 739.6 $ 2,760.0
% change from PY (15.1) % (9.3) % (11.0) % (12.6) %
Nine Months Ended
February 26, 2022
Americas International Retail Total
and Specialty
Orders, as reported $ 1,596.5 $ 742.8 $ 830.9 $ 3,170.2
Adjustments
Dealer divestitures (11.4) - - (11.4)
Orders, organic $ 1,585.1 $ 742.8 $ 830.9 $ 3,158.8
(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 Nine Months Ended
March 4, 2023
0.19 $ 0.56 $ (0.66)
Add: Amortization of purchased intangibles 0.09 0.11 0.26 0.78
Add: Acquisition and integration charges 0.05 - 0.14 1.62
Add: Restructuring charges 0.06 - 0.29 -
Add: Impairment charges 0.48 - 0.48 -
Add: Special charges - - - (0.01)
Add: Debt extinguishment - - - 0.19
Less: Gain on sale of dealer - (0.03) - (0.03)
Tax impact on adjustments (0.15) (0.05) (0.29) (0.55)
Adjusted earnings per share - diluted
0.31 $ 1.44 $ 1.34
Weighted average shares outstanding (used
for calculating adjusted earnings per share)
- diluted 76,066,215 76,511,434 76,036,144 72,356,143
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Analysis of Results for Three and Nine Months
The following table presents certain key highlights from the results of operations for the three and nine months ended:
Three Months Ended Nine Months Ended
(In millions, except share February 26, February 26,
data) March 4, 2023 2022 % Change March 4, 2023 2022 % Change
Net sales $ 984.7 $ 1,029.5 (4.4) % $ 3,130.4 $ 2,845.5 10.0 %
Cost of sales 649.1 690.0 (5.9) % 2,055.1 1,875.3 9.6 %
Gross margin 335.6 339.5 (1.1) % 1,075.3 970.2 10.8 %
Operating expenses 314.4 310.3 1.3 % 964.6 987.4 (2.3) %
Operating earnings (loss) 21.2 29.2 (27.4) % 110.7 (17.2) 743.6 %
Other expenses, net 19.6 9.4 108.5 % 53.8 35.6 51.1 %
Earnings (loss) before
income taxes and equity
income 1.6 19.8 (91.9) % 56.9 (52.8) 207.8 %
Income tax expense
(benefit) 0.5 3.6 (86.1) % 11.1 (9.8) 213.3 %
Equity income from
nonconsolidated affiliates,
net of tax - - - % 0.2 - - %
Net earnings (loss) 1.1 16.2 (93.2) % 46.0 (43.0) 207.0 %
Net earnings attributable
to redeemable
noncontrolling interests 0.7 1.8 n/a 3.8 5.7 n/a
Net earnings (loss)
attributable to
MillerKnoll, Inc. $ 0.4 $ 14.4 (97.2) % $ 42.2 $ (48.7) 186.7 %
Earnings (loss) per share -
basic $ 0.01 $ 0.19 (94.7) % $ 0.56 $ (0.66) 184.8 %
Orders $ 885.4 $ 1,095.9 (19.2) % $ 2,911.9 $ 3,170.2 (8.1) %
Backlog $ 732.3 $ 1,020.6 (28.2) %
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 nine months ended:
Three Months Ended Nine Months Ended
March 4, 2023 February 26, 2022 March 4, 2023 February 26, 2022
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 65.9 67.0 65.6 65.9
Gross margin 34.1 33.0 34.4 34.1
Operating expenses 31.9 30.1 30.8 34.7
Operating earnings (loss) 2.2 2.8 3.5 (0.6)
Other expenses, net 2.0 0.9 1.7 1.3
Earnings (loss) before income taxes and
equity income 0.2 1.9 1.8 (1.9)
Income tax expense (benefit) 0.1 0.3 0.4 (0.3)
Equity income from nonconsolidated
affiliates, net of tax - - - -
Net earnings (loss) 0.1 1.6 1.5 (1.5)
Net earnings attributable to redeemable
noncontrolling interests 0.1 0.2 0.1 0.2
Net earnings (loss) attributable to
MillerKnoll, Inc. - 1.4 1.3 (1.7)
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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 nine months endedMarch 4, 2023 . The amounts presented in the graphs are expressed in millions and have been rounded. [[Image Removed: 234]] [[Image Removed: 237]]
Net sales decreased
•Decreased sales volume within the Global Retail and
•Foreign currency translation decreased Net sales by approximately
•Incremental price increases, net of price discounting, which 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
Net sales increased
•Incremental price increases, net of price discounting drove an increase in Net
sales of approximately
•Increase of
•Increased sales volumes within the International Contract & Specialty segment contributed to sales growth in the quarter by approximately$78 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 Global Retail and
•Foreign currency translation decreased Net sales by approximately$72 million . 31
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Gross Margin
Gross margin was 34.1% in the third quarter of fiscal 2023 as compared to 33.0% in the third quarter of fiscal 2022. The following factors summarize the major drivers of the year-over-year change in gross margin percentage:
•Price increases, net of incremental discounting, contributed to margin improvement of approximately 450 basis points.
•Reductions in variable compensation compared to the prior year had a favorable impact on margin of approximately 70 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 20 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 170 basis points.
•Charges for the impairment of assets associated with the decision to cease operating Fully as a stand-alone brand contributed to a decrease in gross margin of approximately 100 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 34.4% in the nine months ended
•The positive impact of price increases, net of incremental discount, offset some of these pressures by approximately 370 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 70 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 decreased gross margin by approximately 250 basis points.
•Increased labor costs had a negative impact on margin of approximately 60 basis points.
•Charges for the impairment of assets associated with the decision to cease
operating Fully as a stand-alone brand contributed to a decrease in gross margin
of approximately 10 basis points.
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Operating Expenses
The following charts present graphically the primary drivers of the year-over-year change in Operating expenses for the three and nine months endedMarch 4, 2023 . The amounts presented in the graphs are expressed in millions and have been rounded. [[Image Removed: 248]] [[Image Removed: 250]]
Operating expenses increased by
•Restructuring charges related to voluntary and involuntary reductions in the Company's workforce and charges for the impairment of assets associated with the decision to cease operating Fully as a stand-alone brand contributed to an increase in Operating expenses of approximately$26 million ; and •Warranty costs increased by approximately$4 million in the quarter driven primarily by a favorable adjustment to the general accrual in the prior year that did not re-occur in the current period and increased warranty expenses in the current year within theAmericas segment; as well as
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•Studio costs increased by approximately$1 million related to the expansion of physical store locations within the Global Retail segment. These increases were offset in part by: •Compensation and benefit costs, which decreased approximately$16 million , driven by changes in variable-based compensation and incentives and reduction in costs associated with optimization of our organizational structure;
•Acquisition related integration costs, which decreased by approximately
•Favorable foreign currency translation, which reduced Operating expenses by
approximately
Operating expenses decreased by
•Acquisition related integration and amortization expense decreased
•Favorable foreign currency translation of approximately
•Compensation and benefit cost, which decreased approximately
•The consolidation of Knoll results for the entirety of the first quarter of
fiscal 2023, which increased Operating expenses by
•Restructuring charges related to voluntary and involuntary reductions in the Company's workforce and charges for the impairment of assets associated with the decision to cease operating Fully as a stand-alone brand contributed to an increase in Operating expenses of approximately$42 million ;
•The impact of an extra week in the first quarter of fiscal 2023, which
increased Operating expenses by approximately
•Studio costs, which increased by approximately
•Warranty costs, which increased by approximately$7 million in the quarter driven by favorable adjustments to the general warranty accrual recorded in the same period of the prior year, as well as increased warranty expenses in the current year.
•The remaining change was primarily related to a decrease in marketing related program costs.
Other Income/Expense During the three months endedMarch 4, 2023 , net Other expense was$19.6 million , representing an unfavorable change of$10.2 million compared to the same period in the prior year. Other income/expense in the three months endedMarch 4, 2023 included$8.9 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 nine months endedMarch 4, 2023 , net Other expense was$53.8 million , representing an unfavorable change of$18.2 million compared to the same period in the prior year. Other income/expense in the nine months endedMarch 4, 2023 included a loss on extinguishment of debt of approximately$13.4 million , which represented the premium on early debt redemption. Interest expense was$29.2 million higher during the current year resulting from higher levels of debt as well as higher foreign currency losses recorded in the current fiscal year compared to the prior fiscal year.
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 nine month periods endedMarch 4, 2023 . 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: 903]][[Image Removed: 904]] [[Image Removed: 905]][[Image Removed: 906]]
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Americas Contract
Three Months Ended Nine Months Ended
February 26, February 26,
(Dollars in millions) March 4, 2023 2022 Change March 4, 2023 2022 Change
Net sales $ 484.6 $ 509.4 $ (24.8) $ 1,551.7 $ 1,390.0 $ 161.7
Gross margin 149.6 120.9 28.7 452.5 355.5 97.0
Gross margin % 30.9 % 23.7 % 7.2 % 29.2 % 25.6 % 3.6 %
Operating earnings (loss) 32.5 (8.6) 41.1 78.2 (30.1) 108.3
Operating earnings % 6.7 % (1.7) % 8.4 % 5.0 % (2.2) % 7.2 %
For the three month comparative period, Net sales decreased 4.9%, or 4.5%(*) on an organic basis, over the prior year period due to:
•Decreased sales volumes within the segment of approximately$81 million , driven by the impact of a challenging macro-economic environment compounded by pandemic-driven pent-up demand in the prior year; as well as unfavorable foreign currency translation of approximately$1 million ; offset in part by
•Price increases, net of incremental discounting of
For the nine month comparative period, Net sales increased 11.6%, or 5.0%(*) on an organic basis, over the prior year period due to:
•Price increases, net of incremental discounting of
•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; and
•An increase of approximately
•Decreased sales volumes within the segment of approximately$87 million , which was driven by the impact of a challenging macro-economic environment compounded by pandemic-driven pent-up demand last year; as well as unfavorable foreign currency translation of approximately$5 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$29 million due to the increased gross margin percentage of 720 basis points. The increase in gross margin percentage was due primarily to the impact of incremental list price increases, net of contract price discounting, that increased gross margin percentage by 1110 basis points 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. These increases were offset in part by higher commodity and labor costs that decreased gross margin percentage by approximately 300 basis points. •Decreased Operating expenses of$12 million driven primarily by a decrease in variable based compensation costs of$10 million and a decrease in digital and technology program costs. These decreases in Operating expenses were offset in part by increases in restructuring and warranty expenses.
For the nine month comparative period, operating earnings increased
•Increased Gross margin of$97.0 million due to the increased gross margin percentage of 360 basis points. The increase in gross margin percentage was due primarily to the impact of incremental list price increases, net of contract price discounting, that increased gross margin percentage by 820 basis points 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. These increases were offset in part by higher commodity and labor costs that decreased gross margin percentage by 440 basis points. •Decreased Operating expenses of$11 million . The following factors contributed to the change: 36
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•A decrease in variable based compensation of
•Operating expenses also decreased due to lower amortization and integration
charges of
•An increase of approximately
•An increase of approximately
•Increased restructuring expenses of approximately
International Contract & Specialty
Three Months Ended Nine Months Ended
February 26, February 26,
(Dollars in millions) March 4, 2023 2022 Change March 4, 2023 2022 Change
Net sales $ 242.5 $ 241.0 $ 1.5 $ 779.9 $ 655.1 $ 124.8
Gross margin 100.6 93.9 6.7 323.0 259.6 63.4
Gross margin % 41.5 % 39.0 % 2.5 % 41.4 % 39.6 % 1.8 %
Operating earnings 25.3 17.0 8.3 81.5 38.4 43.1
Operating earnings % 10.4 % 7.1 % 3.3 % 10.5 % 5.9 % 4.6 %
For the three month comparative period, Net sales increased 0.6%, or 4.3%(*) on an organic basis, over the prior year period due to:
•Price increases, net of incremental discounting of
•Increased sales volume of approximately
•Unfavorable foreign currency translation of approximately
For the nine month comparative period, Net sales increased 19.1%, or 15.0%(*) 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; and
•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$7 million due to the increase in sales explained above, as well as the increased gross margin percentage of 250 basis points due primarily to the leverage of fixed costs on higher sales volume, lower freight costs as compared to the same period of the prior year and favorable mix; and
•Decreased Operating expenses of approximately
For the nine month comparative period, operating earnings increased
•Increased Gross margin of$63 million due to the increase in sales explained above, and increased gross margin percentage of 180 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; offset in part by 37
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•Increased Operating expenses of$20 million driven primarily from consolidating Knoll results for the entirety of the first quarter of fiscal 2023, the impact of the additional week in the current period as compared to the prior year, partially offset by the impact of foreign currency translation and lower amortization and acquisition related integration charges as compared to the same period of the prior year. Global Retail Three Months Ended Nine Months Ended February 26, February 26, (Dollars in millions) March 4, 2023 2022 Change March 4, 2023 2022 Change Net sales$ 257.6 $ 279.1 $ (21.5) $ 798.8 $ 800.4 $ (1.6) Gross margin 85.4 124.7 (39.3) 299.8 355.1 (55.3) Gross margin % 33.2 % 44.7 % (11.5) % 37.5 % 44.4 % (6.9) % Operating (loss) earnings (24.5) 36.3 (60.8) (4.7) 97.1 (101.8) Operating earnings % (9.5) % 13.0 % (22.5) % (0.6) % 12.1 % (12.7) %
For the three month comparative period, Net sales decreased 7.7%, and decreased 5.5%(*) on an organic basis, over the prior year period due to:
•A decrease in sales volume of approximately
•Unfavorable foreign currency translation of approximately
•Price increases, net of incremental discounting, which increased sales by
For the nine month comparative period, Net sales decreased 0.2%, and decreased 2.6%(*) on an organic basis, over the prior year period due to:
•A decrease in sales volume of approximately
•Unfavorable foreign currency translation of approximately
•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
(*) 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$39 million due to the decrease in sales explained above, and decreased gross margin percentage of 1,150 basis points attributable to the impact of impairment of inventory associated with the decision to cease operating Fully as a stand-alone brand, unfavorable changes in product mix, partially offset in part by the favorable impact of pricing; and •Increased Operating expenses of$22 million driven primarily charges for the impairment of assets associated with the decision to cease operating Fully as a stand-alone brand, offset in part by lower variable compensation.
For the nine month comparative period, Operating earnings decreased
•Decreased Gross margin of$55 million primarily due to decreased gross margin percentage of 690 basis points attributable to Impairment charges from Fully described above as well as 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$47 million primarily due to consolidating Knoll results for the entirety of the first quarter of fiscal 2023, charges for the impairment of assets associated with the decision to cease operating Fully as a stand-alone brand, the impact of the additional week in the current period as compared to the prior year, increased
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costs associated with retail studio locations and digital and technology program costs. These expenses were offset in part by reduced costs associated with variable based compensation.
Corporate
Corporate unallocated expenses totaled
Corporate unallocated expenses totaled$44.3 million for the first nine months of fiscal 2023, a decrease of$78.3 million from the same period of fiscal 2022. The decrease was driven primarily by a reduction of integration and transaction costs related to the Knoll acquisition, which were$89.5 million in the prior period compared to$4.3 million in the third quarter of fiscal 2023.
Liquidity and Capital Resources
The table below summarizes the net change in Cash and cash equivalents for the nine months ended as indicated.
(In millions) March 4, 2023 February 26, 2022 Cash provided by (used in): Operating activities $ 70.4 $ (57.9) Investing activities (53.2) (1,145.0) Financing activities (22.1) 1,061.4 Effect of exchange rate changes (8.3)
(9.0)
Net change in Cash and cash equivalents
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 provided by operating activities for the nine months endedMarch 4, 2023 totaled$70.4 million , as compared to cash used of$57.9 million in the same period of the prior year. The increase in cash inflow is due primarily to an increase in earnings in the current nine month period compared to the same period of the prior year as well as a reduction in working capital. Our working capital consists primarily of receivables from customers, prepaid expenses, accounts payable, accrued compensation, and accrued other expenses. The timing of collection of our receivables, and the timing of spending commitments and payments of our accounts payable, accrued expenses, accrued compensation and related benefits, all affect these account balances.
Cash Flows - Investing Activities
Cash used in investing activities for the nine months endedMarch 4, 2023 was$53.2 million , as compared to$1,145.0 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 nine months endedMarch 4, 2023 , 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 third quarter of fiscal 2023, there were outstanding commitments for capital purchases of$19.7 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$80 million and$90 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 nine months of fiscal 2023 of$60.6 million are$5.2 million less than the same period of the prior year.
Cash Flows - Financing Activities
Cash used in financing activities for the nine months endedMarch 4, 2023 was$22.1 million , as compared to cash provided by financing activities of$1,061.4 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 under the credit agreement the Company entered into during the prior year. Sources of Liquidity 39
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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. At the end of the third 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) March 4, 2023 May 28, 2022 Cash and cash equivalents $ 217.1 $ 230.3 Availability under syndicated revolving line of credit 242.4 296.6 Total liquidity $ 459.5 $ 526.9 Of the Cash and cash equivalents noted above at the end of the third quarter of fiscal 2023, the Company had$200.9 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, SOFR or negotiated terms as outlined in the agreement. As ofMarch 4, 2023 , the total debt outstanding related to borrowings under the syndicated revolving line of credit was$468.5 million with available borrowings against this facility of$242.4 million . The Company intends to repatriate$185.0 million of undistributed foreign earnings of which$104.0 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 onMarch 4, 2023 .
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 40
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the use of estimates and judgments in preparing the financial statements is
provided in the Company's Annual Report on Form 10-K for the year ended
New Accounting Standards
See Note 2 to the Condensed Consolidated Financial Statements.
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 Knoll 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 and any related 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 the impact 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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