Item 1A Risk Factors
The following risk factors and other information included in this report should be carefully considered. The risks and uncertainties described below are not the only ones we face; others, either unforeseen or currently deemed not material, may also have a negative impact on our Company. If any of the following occurs, our business, operating results, cash flows, and financial condition could be materially adversely affected.
Business Related Risks
We may not be successful in implementing and managing our growth strategy.
We have established a growth strategy for the business based on a changing and evolving world. Through this strategy, we are focused on taking advantage of the changing composition of the office floor plate, the greater desire for customization from our customers, new technologies, and trends towards urbanization and working from home.
While we have confidence that our strategic plan reflects opportunities that are appropriate and achievable, and that we have anticipated and will manage the associated risks, there is the possibility that the strategy may not deliver the projected results due to inadequate execution, incorrect assumptions, sub-optimal resource allocation, or changing customer requirements.
To meet our goals, we believe we will be required to continually invest in the research, design, and development of new products and services, and there is no assurance that such investments will have commercially successful results.
Certain growth opportunities may require us to invest in acquisitions, alliances, and the startup of new business ventures. These investments, if available, may not perform according to plan and may involve the assumption of business, operational, or other risks that are new to our business.
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Future efforts to expand our business may impact our ability to compete for business. It may also put the availability and/or value of our capital investments within these regions at risk. These expansion efforts expose us to operating environments with complex, changing, and in some cases, inconsistently-applied legal and regulatory requirements. Developing knowledge and understanding of these requirements poses a significant challenge, and failure to remain compliant with them could limit our ability to continue doing business in these locations.
Pursuing our strategic plan in new and adjacent markets, as well as within developing economies, will require us to find effective new channels of distribution. There is no assurance that we can identify or otherwise develop these channels of distribution.
In connection with the July 2021 acquisition of Knoll, we incurred significant additional indebtedness, which has increased our interest expense and could adversely affect us, including by decreasing our business flexibility.
The consolidated long-term debt of MillerKnoll as of June 1, 2024 was $1.29 billion. As a result of our acquisition of Knoll, we substantially increased our indebtedness, which has increased our interest expense and could have the effect, among other things, of reducing our flexibility to respond to changing business and economic conditions. We have also incurred various costs and expenses associated with such indebtedness. The amount of cash required to pay interest on our increased indebtedness levels and thus the demands on our cash resources are greater than the amount of cash flows previously required to service our indebtedness. The increased levels of indebtedness will also reduce funds available for working capital, capital expenditures, acquisitions, and other general corporate purposes and may create competitive disadvantages for MillerKnoll relative to other companies with lower debt levels. If we do not achieve the expected benefits and cost savings from the acquisition, or if the financial performance of the combined company does not meet current expectations, then our ability to service our indebtedness may be adversely impacted.
The indebtedness incurred in connection with the acquisition of Knoll contains various covenants that impose restrictions on us that may affect our ability to operate our business. These include both affirmative and negative covenants that, subject to certain significant exceptions, restrict the ability of us and certain of our subsidiaries to, among other things, incur liens on our property, incur additional indebtedness, enter into sale and lease-back transactions, make loans, advances, or other investments, make non-ordinary course asset sales, declare or pay dividends, engage in share repurchases or make other distributions with respect to equity interests, and/or merge or consolidate with any other person or sell or convey certain assets to any one person. In addition, the definitive documentation governing such indebtedness contains a financial maintenance covenant that requires us to maintain a certain leverage ratio at the end of each fiscal quarter. Our ability to comply with these provisions may be affected by events beyond our control. Failure to comply with these covenants could result in an event of default, which, if not cured or waived, could accelerate our repayment obligations under such indebtedness.
In addition, we may be required to raise substantial additional financing to fund working capital, capital expenditures, acquisitions, or other general corporate requirements. Our ability to arrange additional financing will depend on, among other factors, our financial position and performance, as well as prevailing market conditions and other factors beyond our control. There is no assurance we will be able to obtain such additional financing on terms acceptable to us or at all.
We have incurred and may continue to incur significant costs in connection with the integration of Knoll, which may be in excess of those we anticipate.
We have incurred and expect to continue to incur a number of non-recurring fees and costs associated with combining the operations of Herman Miller and Knoll and achieving desired synergies. These costs and expenses include those related to formulating and implementing integration plans, including facilities and systems consolidation costs and employment-related costs. Although we expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, should allow us to offset integration-related costs over time, this net benefit may not be achieved in the near term, or at all.
Macroeconomic and Workplace Trends Related Risks
Adverse economic and industry conditions have had a negative impact on our business, results of operations and financial condition.
Customer demand within the contract furniture and retail furnishings industries is affected by various macroeconomic factors with general corporate profitability, service sector employment levels, new office construction rates, and existing office vacancy rates being among the most influential factors. Continued declines in these measures over recent years have had an adverse effect on overall furniture demand. Additionally, factors and changes specific to our industry, such as developments in technology, governmental standards and regulations, and health and safety issues, can influence demand.
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The markets in which we operate are highly competitive and we may not be successful in winning new business.
We are one of several companies competing for new business within the furniture industry. Many of our competitors offer similar categories of products, including office seating, systems and freestanding furniture, casegoods, storage products, as well as residential, education and healthcare furniture solutions. Although we believe that our innovative product design, functionality, quality, depth of knowledge, and strong network of distribution partners differentiate us in the marketplace, increased market pricing pressure and other factors could make it difficult for us to win new business with certain customers and within certain market segments at acceptable profit margins.
The retail furnishings market is highly competitive. We compete with national and regional furniture retailers, mail order catalogs and online retailers focused on home furnishings. We compete with these and other retailers for customers, suitable retail locations, vendors, qualified employees and management personnel. Some of our competitors have significantly greater financial, marketing and other resources than we possess. This may result in these competitors being quicker at important metrics such as adapting to changes, devoting greater resources to the marketing and sale of their products, generating greater national brand recognition, or adopting more aggressive pricing and promotional policies, including free shipping offers. In addition, increased catalog mailings and/or digital marketing campaigns by our competitors may adversely affect response rates to our own marketing efforts. As a result, increased competition may adversely affect our future financial performance.
Our business presence outside the United States exposes us to certain risks that could negatively affect our results of operations and financial condition.
We have significant manufacturing and sales operations in the United Kingdom, which represents our largest single marketplace outside the United States. Concerns exist relating to potential tariffs and customs regulations and the potential for short term logistics disruption as any such changes are implemented. This will impact both our suppliers and customers, including distributors, and could result in product delays and inventory issues. Further uncertainty in the marketplace also brings risk to accounts receivable and could result in delays in collection and greater bad debt expense. There also remains a risk for the value of the British Pound, Danish Krone, and/or the Euro to further deteriorate, reducing the purchasing power of customers in these regions and potentially undermining the financial health of the Company's suppliers and customers in other parts of the world.
We also have manufacturing operations in China, India, Italy, Canada, Mexico and Brazil. Additionally, our products are sold internationally through controlled subsidiaries or branches in Canada, Denmark, Italy, Korea, Mexico, Australia, China (including Hong Kong), India, Brazil, and other European countries. The Company's products are offered in Canada, Europe, the Middle East, Africa, Latin America and the Asia/Pacific region primarily through dealers and retail channels.
Doing business internationally exposes us to certain risks, many of which are beyond our control and could potentially impact our ability to design, develop, manufacture, or sell products in certain countries. These factors include, without limitation, political, social, and economic conditions; global trade conflicts and trade policies; legal and regulatory requirements; labor and employment practices; cultural practices and norms; natural disasters; security and health concerns; protection of intellectual property; and changes in foreign currency exchange rates.
In some countries, the currencies in which we import and export products can differ. Fluctuations in the rate of exchange between these currencies could negatively impact our business and our financial performance. Additionally, tariff and import regulations, international tax policies and rates, and changes in U.S. and international monetary policies may have an adverse impact on results of operations and financial condition.
In connection with the ongoing war between Russia and Ukraine, the U.S. government has imposed enhanced export controls on certain products and sanctions on certain industry sectors and parties in Russia. MillerKnoll is not fulfilling any existing orders or accepting new orders from Russia or Belarus at this time. As a safety measure, we have also stopped taking new orders and fulfilling orders in Ukraine. This region represents a small portion of our International Contract & Specialty business, and we do not rely on any material goods from suppliers in these regions. While we do not have manufacturing facilities or offices in the region, we have historically sold products to two dealers in Russia and two in Belarus. None of the revenue recognized in fiscal year 2024 and 2023 was from dealers located in countries under sanction.
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Further escalation of geopolitical tensions could have a broader impact that expands into other markets where we do business, which could adversely affect our business and/or our supply chain, business partners or customers in the broader region. The continued conflict in that region, as well as the current and additional international sanctions against Russia, are likely to further increase the cost of various supplies, particularly for petroleum based products. The impact from this conflict, as well as the international sanctions, cannot be predicted or anticipated with any reasonable degree of certainty, including the impact on the Company.
A sustained downturn in the economy could adversely impact our access to capital.
The disruptions in the global economic and financial markets during 2007 to 2009 adversely impacted the broader financial and credit markets, at times reducing the availability of debt and equity capital for the market as a whole. Conditions such as these could re-emerge in the future. Accordingly, our ability to access the capital markets could be restricted at a time when we would like, or need, to access those markets, which could have an adverse impact on our flexibility to react to changing economic and business conditions. The resulting lack of available credit, increased volatility in the financial markets and reduced business activity could materially and adversely affect our business, financial condition, results of operations, our ability to take advantage of market opportunities and our ability to obtain and manage our liquidity. In addition, the cost of debt financing and the proceeds of equity financing may be materially and adversely impacted by these market conditions. The extent of any impact would depend on several factors, including our operating cash flows, the duration of tight credit conditions and volatile equity markets, our credit capacity, the cost of financing, and other general economic and business conditions. Our credit agreements contain performance covenants, such as a limit on the ratio of debt to earnings before interest, taxes, depreciation and amortization, and limits on subsidiary debt and incurrence of liens. Although we believe none of these covenants is currently restrictive to our operations, our ability to meet the financial covenants can be affected by events beyond our control.
Manufacturing, Supply Chain and Distribution Related Risks
Tariffs imposed by the U.S. government could have a material adverse effect on our results of operations.
The imposition of tariffs by the U.S. government on various products imported from certain countries, as well as countering tariffs on the export of U.S. goods, has had, and will likely continue to have, an adverse impact on our business, including as a result of increased costs for certain of our raw materials and increasing the costs for certain products that we export to other countries. Accordingly, these tariffs and the possibility of broader trade conflicts stemming from the tariffs could negatively impact our business in the future. The tariffs on imports, most notably imports from China, have impacted the cost of steel, a key commodity that we consume in producing products. Given the significance of steel costs to our direct materials costs, we closely monitor trade tensions between the U.S. and China. The potential impact to our direct material costs due to tariffs on Chinese imports is somewhat limited, however, as purchases of direct materials (mainly component parts and products manufactured by third parties) from China represented an estimated 2% of our consolidated cost of sales for fiscal 2024. Going forward, continued or increased tariffs could negatively impact our gross margin and operating performance. These factors also have the potential to significantly impact global trade and economic conditions in many of the regions where we do business.
Disruptions in the supply of raw and component materials could adversely affect our manufacturing and assembly operations.
We rely on outside suppliers to provide on-time shipments of the various raw materials and component parts used in our manufacturing and assembly processes. The timeliness of these deliveries is critical to our ability to meet customer demand. Disruptions in this flow of delivery may have a negative impact on our business, results of operations, and financial condition.
Increases in the market prices of manufacturing materials may negatively affect our profitability.
The costs of certain manufacturing materials used in our operations are sensitive to shifts in commodity market prices, including the impact of the U.S. and retaliatory tariffs. In particular, the costs of steel, plastic, aluminum components, and particleboard are sensitive to the market prices of commodities such as raw steel, aluminum, crude oil, lumber, and resins.
Disruptions within our dealer network could adversely affect our business.
Our ability to manage existing relationships within our network of independent dealers is crucial to our ongoing success. Although the loss of any single dealer would not have a material adverse effect on the overall business, our business within a given market could be negatively impacted by disruptions in our dealer network caused by the termination of commercial working relationships, ownership transitions, or dealer financial difficulties.
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If dealers go out of business or restructure, we may suffer losses because they may not be able to pay for products already delivered to them. Also, dealers may experience financial difficulties, creating the need for outside financial support, which may not be easily obtained. The Company has, on occasion, agreed to provide direct financial assistance through term loans, lines of credit, and/or loan guarantees to certain dealers. Those activities increase our financial exposure.
A continued shortage of qualified labor could negatively affect our business and materially reduce earnings.
The future success of our operations depends on our ability, and the ability of third parties on which we rely, to identify, recruit, develop and retain qualified and talented individuals in order to supply and deliver our products. Any shortage of qualified labor could have a negative impact on our business. Employee recruitment, development and retention efforts that we or such third parties undertake may not be successful, which could result in a shortage of qualified individuals in future periods. Any such shortage could decrease our ability to effectively produce and meet customer demand. Such a shortage would also likely lead to higher wages for employees (or higher costs to purchase the services of such third parties) and a corresponding reduction in our results of operations. In the current operating environment, we are experiencing a shortage of qualified labor in certain geographies, particularly with plant production workers, resulting in increased costs from certain temporary wage actions, such as hiring and referral bonus programs. A continuation of such shortages for a prolonged period of time could have a material adverse effect on our operating results.
Financial Related Risks
We are subject to risks associated with self-insurance related to health benefits.
We are self-insured for our health benefits and maintain per employee stop loss coverage; however, we retain the insurable risk at an aggregate level. Therefore unforeseen or catastrophic losses in excess of our insured limits could have a material adverse effect on the Company’s financial condition and operating results. See Note 1 of the Consolidated Financial Statements for information regarding the Company’s retention level.
Goodwill and indefinite-lived intangible asset impairment charges may adversely affect our operating results.
We have a substantial amount of goodwill and indefinite-lived intangible assets, primarily trademarks, on our balance sheet. We test the goodwill and intangible assets for impairment both on an annual basis and when events occur or circumstances change that indicate that the fair value of the reporting unit or intangible asset may be below its carrying amount. Fair value determinations require considerable judgment and are sensitive to inherent uncertainties and changes in estimates and assumptions regarding actual and forecasted revenue growth rates, operating margins, discount rates, and royalty rates. Declines in market conditions, a trend of weaker than anticipated financial performance for our reporting units, declines in projected revenue for our trademarks, a decline in our share price for a sustained period of time, an increase in the market-based weighted average cost of capital, or a decrease in royalty rates, among other factors, are indicators that the carrying value of our goodwill or indefinite-life intangible assets may not be recoverable. We may be required to record a goodwill or intangible asset impairment charge that, if incurred, could have a material adverse effect on our financial results.
Impairment of long-lived assets may adversely affect our operating results.
Our long-lived asset groups are subject to an impairment assessment when certain triggering events or circumstances indicate that their carrying value may be impaired. If the carrying value exceeds our estimate of future undiscounted cash flows of the operations related to the asset group, an impairment is recorded for the difference between the carrying amount and the fair value of the asset group. The results of these tests for potential impairment may be adversely affected by unfavorable market conditions, our financial performance trends, or an increase in interest rates, among other factors. If as a result of the impairment test we determine that the fair value of any of our long-lived asset groups is less than its carrying amount, we may incur an impairment charge that could have a material adverse effect on our financial results.
Costs related to product defects could adversely affect our profitability.
We incur various expenses related to product defects, including product warranty costs, product recall and retrofit costs, and product liability costs. These expenses relative to product sales vary and could increase. We maintain reserves for product defect-related costs based on estimates and our knowledge of circumstances that indicate the need for such reserves. We cannot, however, be certain that these reserves will be adequate to cover actual product defect-related claims in the future. Any significant increase in the rate of our product defect expenses could have a material adverse effect on operations.
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General Risks
We are subject to risks and costs associated with protecting the integrity and security of our systems and confidential information.
We collect certain customer-specific data, including credit card information, in connection with orders placed through our eCommerce websites, direct-mail catalog marketing program, and retail studios. For these sales channels to function and develop successfully, we and other parties involved in processing customer transactions must be able to transmit confidential information, including credit card information and other personal information regarding our customers, securely over public and private networks. Third parties may have or develop the technology or knowledge to breach, disable, disrupt or interfere with our systems or processes or those of our vendors. While we believe we take reasonable steps to protect the security and confidentiality of the information we collect, we cannot guarantee that our security measures will effectively prevent others from obtaining unauthorized access to our information and our customers’ information. The techniques used to obtain unauthorized access to systems change frequently and are not often recognized until after they have been launched.
Any person who circumvents our security measures could destroy or steal valuable information or disrupt our operations. Any security breach could cause consumers to lose confidence in the security of our information systems, including our eCommerce websites or retail studios and choose not to purchase from us. Any security breach could also expose us to risks of data loss, litigation, regulatory investigations, and other significant liabilities. Such a breach could also seriously disrupt, slow or hinder our operations and harm our reputation and customer relationships, any of which could damage our business.
A security breach includes a third party wrongfully gaining unauthorized access to our systems for the purpose of misappropriating assets or sensitive information, loading corrupting data, or causing operational disruption. These actions may lead to a significant disruption of the Company’s IT systems and/or cause the loss of business and business information resulting in an adverse business impact, including: (1) an adverse impact on future financial results due to theft, destruction, loss misappropriation, or release of confidential data or intellectual property; (2) operational or business delays resulting from the disruption of IT systems, and subsequent clean-up and mitigation activities; and (3) negative publicity resulting in reputation or brand damage with customers, partners or industry peers.
The United States federal and state governments are increasingly enacting laws and regulations to protect consumers against identity theft. Also, as our business expands globally, we are subject to data privacy and other similar laws in various foreign jurisdictions. If we are the target of a cybersecurity attack resulting in unauthorized disclosure of our customer data, we may be required to undertake costly notification procedures. Compliance with these laws will likely increase the costs of doing business. If we fail to implement appropriate safeguards or to detect and provide prompt notice of unauthorized access as required by some of these laws, we could be subject to potential fines, claims for damages and other remedies, which could harm our business.
Due to the political uncertainty and military actions involving Russia, Ukraine, and surrounding regions, we and the third parties upon which we rely may be vulnerable to a currently heightened risk of information technology breaches, computer malware, or other cyber-attacks, including attacks that could materially disrupt our systems and operations, supply chain, and ability to produce, sell and distribute our products.
We are unable to control the factors affecting consumer spending. Declines in consumer spending on furnishings could reduce demand for our products.
The operations of our Global Retail segment are sensitive to a number of factors that influence consumer spending, including general economic conditions, consumer disposable income, unemployment, inclement weather, availability of consumer credit, consumer debt levels, conditions in the housing market, interest rates, sales tax rates and rate increases, inflation, and consumer confidence in future economic conditions. Adverse changes in these factors have reduced, and in the future may further reduce consumer demand for our products, resulting in reduced sales and profitability.
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A number of factors that affect our ability to successfully implement our retail studio strategy, including opening new locations and closing existing studios, are beyond our control. These factors may harm our ability to increase the sales and profitability of our retail operations.
Approximately 41% of the sales within our Global Retail segment are transacted within our retail stores. Additionally, we believe our retail stores have a direct influence on the volume of business transacted through other channels, including our consumer eCommerce and direct-mail catalog platforms, as many customers utilize these physical spaces to view and experience products prior to placing an order online or through the catalog call center. Our ability to open additional stores or close existing stores successfully will depend upon a number of factors beyond our control, including, without limitation:
•general economic conditions;
•identification and availability of suitable locations;
•success in negotiating new leases and amending or terminating existing leases on acceptable terms;
•success of other retailers in and around our retail locations;
•ability to secure required governmental permits and approvals;
•hiring and training skilled studio operating personnel; and
•landlord financial stability.
We may incur significant increased costs and become subject to additional potential liabilities under environmental and other laws and regulations aimed at combating climate change.
Increased focus by the U.S. and other governmental authorities on climate change and other environmental matters has led to enhanced regulation in these areas, which is expected to result in increased compliance costs and could subject us to additional potential liabilities. The extent of these costs and risks is difficult to predict and will depend in large part on the extent of final regulations and the ways in which those regulations are enforced. We operate and have manufacturing facilities in multiple regions across the globe, and the impact of additional regulations in this area is likely to vary by region. It is expected the costs we incur to comply with any such final regulations and implement our own sustainability goals could be material.
Government and other regulations could adversely affect our business.
Government and other regulations apply to the manufacture and sale of many of our products. Failure to comply with these regulations or failure to obtain approval of products from certifying agencies could adversely affect the sales of these products and have a material negative impact on operating results.
Item 1B Unresolved Staff Comments
None.
Item 1C Cybersecurity
We recognize the importance of assessing, identifying, and managing material risks associated with cybersecurity threats, as such term is defined in Item 106(a) of Regulation S-K. These risks include, among other things: operational risks, intellectual property theft, fraud, extortion, harm to employees or customers and violation of data privacy or security laws. To mitigate the threat to our business, we take a comprehensive approach to cybersecurity risk management. The Company’s Board of Directors as well as its Chief Technology Officer (“CTO”) and Chief Information Security Officer (“CISO”), are actively involved in the oversight of our risk management program, of which cybersecurity represents an important component. We have established policies, standards, processes, and practices for assessing, identifying, managing and mitigating material risks from cybersecurity threats.
Risk Assessment and Management
We rely on a multidisciplinary team, including our information security function, legal department, management, and third-party service providers to identify, assess, remediate and manage cybersecurity threats and risks. We identify and assess risks from cybersecurity threats by monitoring and evaluating our threat environment and our risk profile using various methods including, for example, manual and automated tools, subscribing to reports and services that identify cybersecurity threats, analyzing reports of threats and threat actors, conducting scans of the threat environment, utilizing internal and external audits, and conducting threat and vulnerability assessments.
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At least annually, we review our security controls and address information security vulnerabilities, conduct security testing, and assess our external sources for their security risk (e.g., security incidents, data security, security controls, third parties, etc.). The results of the assessment are used to drive alignment and prioritization of initiatives to enhance our security posture, improve security processes, and to manage a broader enterprise-level risk program that is presented to the Board of Directors, the Audit Committee, and members of management.
The Company maintains various technical, physical, and organizational measures, processes, standards, and policies designed to manage and mitigate material risks from cybersecurity threats against our information systems and data. These include:
•incident detection and response
•vulnerability management
•disaster recovery plans
•internal controls within our accounting and financial reporting functions
•encryption of data
•network security controls
•access controls
•physical security
•asset management
•systems monitoring
•vendor risk management program
•employee training.
Notwithstanding the approach we take to cybersecurity, we may not be successful in preventing or mitigating a cybersecurity incident that could have a material adverse effect on the Company. Refer to Item 1A for a discussion of cybersecurity risks.
Governance
Our Board of Directors is responsible for overseeing our enterprise risk management activities, and each of our Board committees assists the Board in the role of risk oversight. The full Board receives an update on the Company’s risk management process and the risk trends related to cybersecurity at least annually. The Audit Committee specifically assists the Board of Directors in its oversight of risks related to cybersecurity. The Audit Committee receives quarterly reports from management about emerging data privacy and cybersecurity developments and threats, the Company’s cybersecurity posture which includes a review of the state of the Company’s cybersecurity, and the Company’s strategy to mitigate data protection and cybersecurity risks.
Our CISO, CTO, and General Counsel have primary responsibility for assessing and managing material cybersecurity risks and are members of management’s Information Security Council (the “Security Council”), which is a governing body that drives alignment on security decisions across the Company. The Security Council meets regularly to review and make recommendations on security policies and procedures, risk mitigation strategies, incident response and management plans and stakeholder engagement.
We have an established process led by our Security Council to govern our assessment, response, and notifications internally and externally upon the occurrence of a cybersecurity incident. Depending on the nature and severity of an incident, this process provides escalation procedures to our CEO, Audit Committee, and the Board of Directors.
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Item 2 Properties
The Company owns or leases facilities located throughout the United States and several foreign countries. The location, square footage and use of the most significant facilities at June 1, 2024 were as follows:
Owned Locations Square Footage (in Thousands) Use
Zeeland, Michigan 771 Manufacturing, Warehouse, Office
East Greenville, Pennsylvania 735 Manufacturing, Warehouse, Office
Spring Lake, Michigan 615 Manufacturing, Warehouse, Office
North York, Canada 386 Manufacturing, Warehouse, Office
Muskegon, Michigan 367 Manufacturing, Office
Holland, Michigan 357 Warehouse
Holland, Michigan 293 Manufacturing, Office
Foligno, Italy 260 Manufacturing, Warehouse, Office
Holland, Michigan 242 Office, Design
Sheboygan, Wisconsin 208 Manufacturing, Warehouse, Office
Melksham, United Kingdom 170 Manufacturing, Warehouse, Office
Graffignana, Italy 108 Manufacturing, Warehouse, Office
Leased Locations Square Footage (in Thousands) Use
Alburtis, Pennsylvania 718 Warehouse
Batavia, Ohio 618 Warehouse
Dongguan, China 423 Manufacturing, Office
Ringsted, Denmark 274 Warehouse
Berlin, Germany 220 Warehouse
West Chester, Ohio 220 Warehouse
Bangalore, India 217 Manufacturing, Warehouse, Office
La Grange Highlands, Illinois 210 Warehouse
Atlanta, Georgia 205 Manufacturing, Warehouse, Office
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The properties above are primarily used in the Company's segments as indicated below:
Segment Primarily Supported Owned Leased Total
Americas Contract 8 3 11
International Contract & Specialty 3 4 7
Global Retail — 2 2
Corporate 1 — 1
As of June 1, 2024, the Company operated 75 retail stores (including 37 operating under the DWR brand, 1 under the HAY brand, 29 Herman Miller stores, 3 Muuto stores, 4 Knoll stores and a multi-brand Chicago store) that totaled approximately 560,264 square feet of selling space. The Company also operated 4 retail outlet stores. The Company maintains administrative and sales offices and showrooms in various other locations throughout North America, Europe, Asia Pacific and Latin America.
The Company considers its existing facilities to be in good condition and adequate for its design, production, distribution, and selling requirements.
Item 3 Legal Proceedings
The Company is involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such proceedings and litigation currently pending will not materially affect the Company’s consolidated operations, cash flows or financial condition.
Information About Our Executive Officers
Certain information relating to executive officers of the Company as of June 1, 2024 is as follows:
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Except as discussed below, each of the named officers has served the Company in an executive position for more than five years.
Mr. Baldwin joined MillerKnoll in 2021 and serves as Group President. Prior to the Company's acquisition of Knoll in July 2021, Mr. Baldwin was Chief Operating Officer & President, Workplace at Knoll and also held leadership positions at Kohler Co.
Ms. Propst joined MillerKnoll in 2020 and serves as President of the Company's Global Retail segment. Prior to joining MillerKnoll, Ms. Propst spent seven years at Bed Bath and Beyond where she most recently served as President and Chief Merchandising Officer of One Kings Lanes, as well as Chief Brand Officer for Bed Bath and Beyond.
There are no family relationships between or among the above-named executive officers. There are no arrangements or understandings between any of the above-named officers pursuant to which any of them was named an officer.
Item 4 Mine Safety Disclosures
Not applicable.
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PART II
Item 5 Market for the Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities and Dividend Market Information
MillerKnoll, Inc.'s common stock is traded on the Nasdaq Global Select Market System (Symbol: MLKN). As of July 19, 2024, there were approximately 40,000 shareholders of record, including individual participants in security position listings, of the Company's common stock.
Dividends were declared and paid quarterly for fiscal 2024 as approved by the Board of Directors. On April 16, 2024, the Company's Board of Directors approved a quarterly cash dividend of 18.75 cents ($0.1875) per share that was paid on July 15, 2024, to shareholders of record on June 1, 2024. While it is anticipated that the Company will continue to pay quarterly cash dividends, the amount and timing of such dividends is subject to the discretion of the Board depending on the Company's future results of operations, financial condition, capital requirements and other relevant factors.
During the period covered by this report, the Company did not sell any shares of common stock that were not registered under the Securities Act of 1933.
Issuer Purchases of Equity Securities
On January 16, 2019, the Company announced a share repurchase plan authorized by the Board of Directors providing for a share repurchase authorization of $250.0 million with no specified expiration date. On July 16, 2024, the Company announced that the Board of Directors approved an increase to this repurchase plan to authorize an additional $200 million to fund share repurchases, in addition to the $66.3 million remaining as of June 1, 2024.
The following is a summary of share repurchase activity during the fiscal quarter ended June 1, 2024:
(1) Amounts are as of the end of the period indicated
Under the repurchase program, the Company may repurchase shares from time to time in any manner management believes to be in the best interests of the Company and its shareholders, including through privately negotiated transactions and open market purchases, which may be made pursuant to a trading plan adopted in accordance with Rule 10b5-1. Repurchases will be made at management’s discretion, subject to general market conditions, alternative uses for capital, the Company’s financial performance, and other factors. The Company currently expects to fund any repurchases of its shares through existing cash on hand and future cash flows.
The repurchase program may be suspended, terminated, or modified at any time and from time to time, and for any reason, including market conditions, the availability of alternative investment opportunities, liquidity, and other factors deemed appropriate. These factors may also affect the timing and amount of share repurchases. The repurchase program does not obligate the Company to purchase any shares.
In accordance with the Inflation Reduction Act of 2022, our fiscal year 2024 share repurchases in excess of issuances are subject to a 1% excise tax. The excise tax is recognized as part of the cost basis of shares acquired in the Consolidated Statements of Stockholders' Equity for fiscal year 2024 but is excluded from amounts presented above.
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Stockholder Return Performance Graph
Set forth below is a line graph comparing the yearly percentage change in the cumulative total stockholder return on the Company's common stock with that of the cumulative total return of the Standard & Poor's 500 Stock Index and the Company's Peer Group for the five-year period ended June 1, 2024. The Peer Group consists of HNI Corporation and Steelcase Inc. These companies also manufacture office furniture and have industry characteristics that we believe are similar to MillerKnoll, Inc.
The graph assumes an investment of $100 on June 1, 2019 in the Company's common stock, the Standard & Poor's 500 Stock Index and the Peer Group, with dividends reinvested.
Information required by this item is also contained in Item 12 of this report.
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Item 6 [Reserved]
Not applicable.
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Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the issues discussed in Management's Discussion and Analysis in conjunction with the Company's Consolidated Financial Statements and the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K. Refer also to the information provided under the heading "Forward-Looking Statements" in this Annual Report on Form 10-K.
Executive Overview
MillerKnoll is a collective of dynamic brands that comes together to design the world we live in. From the spaces we make that help us live and work better, to how we manufacture our products, to the ways we solve challenges facing our customers and global community, design is our tool for creating positive impact. Our optimism leads us as we redefine modern for the 21st century, shaping a future that’s more sustainable, caring, and beautiful for all people and our planet.
MillerKnoll's products are sold internationally through controlled subsidiaries or branches in various countries including the United Kingdom, Denmark, Italy, France, the Netherlands, Canada, Japan, Mexico, Australia, Singapore, China, Hong Kong, India, and Brazil. 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 Company is globally positioned in terms of manufacturing operations. In North America, manufacturing and distribution operations are in Georgia, New York, North Carolina, Michigan, Pennsylvania, and Texas in the United States, as well as Toronto and Mexico City. In Europe, the Company's manufacturing presence is in the United Kingdom and Italy. Manufacturing operations globally also include facilities located in Brazil, China, and India. The Company manufactures products using a system of lean manufacturing techniques collectively referred to as the MillerKnoll Performance System (MKPS). For its contract furniture business, MillerKnoll strives to maintain efficiencies and cost savings by minimizing the amount of inventory on hand. Accordingly, production is order-driven with direct materials and components purchased as needed to meet demand. These factors result in a high rate of inventory turns related to our manufactured inventories.
A key element of the Company's manufacturing strategy is to limit fixed production costs by sourcing component parts from strategic suppliers. This strategy has allowed the Company to increase the variable nature of its cost structure, while retaining proprietary control over those production processes that the Company believes provide a competitive advantage. As a result of this strategy, the Company's manufacturing operations are largely assembly-based.
A key element of the Company's growth strategy is to scale the Global Retail business through the Company's Design Within Reach ("DWR"), HAY, Knoll, Muuto, and Herman Miller retail operations. The Global Retail business provides a channel to bring MillerKnoll's iconic and design-centric products to retail customers, along with other proprietary and third-party products, with a focus on modern design.
The Company is comprised of various operating segments as defined by generally accepted accounting principles in the United States (U.S. GAAP). The operating segments are determined on the basis of how the Company internally reports and evaluates financial information used to make operating decisions. The Company has identified the following segments:
•Americas Contract — Includes the operations associated with the design, manufacture and sale of furniture products directly or indirectly through an independent dealership network for office, healthcare, and educational environments throughout North and South America.
•International Contract & Specialty — Includes the operations associated with the design, manufacture and sale of furniture products, directly or indirectly through an independent dealership network in Europe, the Middle East, Africa and Asia-Pacific as well as the global activities of the Specialty brands, which include Holly Hunt, Spinneybeck, Maharam, Edelman, and Knoll Textiles.
•Global Retail — Includes global operations associated with the sale of modern design furnishings and accessories to third party retailers, as well as direct to consumer sales through eCommerce, direct-mail catalogs, and physical retail stores.
The Company also reports a corporate category consisting primarily of unallocated corporate expenses related to general corporate functions, including, but not limited to, certain legal, executive, corporate finance, information technology, administrative, and acquisition-related costs.
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Core Strengths
The Company relies on the following core strengths in delivering solutions to customers:
•Product Portfolio and Brand Collective - MillerKnoll is a collective of globally recognized design brands known for working with some of the most well-known and respected designers in the world. Combined, the Company represents over 100 years of design research and exploration in service of humanity. Within the industries in which the Company operates, Herman Miller and Knoll, along withColebrook Bosson Saunders, DatesWeiser, Design Within Reach, Edelman, Geiger, HAY, Holly Hunt, Maharam, Muuto, NaughtOne, and Spinneybeck|FilzFelt are acknowledged as leading brands that inspire architects and designers to create their best design solutions. This portfolio has enabled MillerKnoll to connect with new audiences, channels, geographies, and product categories. Leveraging the collective brand equity of MillerKnoll across the lines of business is an important element of the Company's business strategy.
•Design Leadership - The Company is committed to developing research-based functionality and aesthetically innovative new products and has a history of doing so, in collaboration with a global network of leading independent designers. The Company believes its skills and experience in matching problem-solving design with the workplace needs of customers provide the Company with a competitive advantage in the marketplace. An important component of the Company's business strategy is to actively pursue a program of new product research, design, and development. The Company accomplishes this through the use of an internal research and engineering staff that engages with third party design resources generally compensated on a royalty basis.
•Unique Business Model - The Company has built a multi-channel distribution capability that it considers unique. Through contract furniture dealers, direct customer sales, retail stores and studios, eCommerce, wholesalers, and independent retailers, the Company serves contract and residential customers across a range of channels and geographies. As it pertains to its operations, the Company was among the first in the industry to embrace the concepts of lean manufacturing. MKPS provides the foundation for all the Company's manufacturing operations. The Company is committed to continuously improving both product quality and production and operational efficiency. The Company believes these concepts hold significant promise for further gains in reliability, quality, and efficiency.
•Global Scale and Reach - In addition to its global omni-channel distribution capability, the Company has a global network of designers, suppliers, manufacturing operations, and research and development centers that position the Company to serve contract and residential customers globally. The Company believes that leveraging this global scale will be an important enabler to executing its strategy.
•Extraordinary People - We believe that our employees are a critical success factor for our business. We strive to identify, hire, develop, motivate and retain the best employees. Our ability to attract, engage, and retain key employees has been and will remain critical to our success.
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Channels of Distribution
The Company's products and services are offered to most of its customers under standard trade credit terms between 30 and 45 days. For all the items below, revenue is recognized when control transfers to the customer. The Company's products and services are sold through the following distribution channels:
•Independent Contract Furniture Dealers - Most of the Company's product sales are made to a global network of independently owned and operated contract furniture dealerships. These dealers purchase the Company's products and distribute them to end customers. Many of these dealers also offer furniture-related services, including product installation.
•Direct Contract Sales - The Company sells products and services directly to end customers without an intermediary (e.g., sales to the U.S. federal government). In most of these instances, the Company contracts separately with a dealer or third-party installation company to provide sales-related services.
•eCommerce - The Company sells products in its portfolio of brands across the globe, through localized Herman Miller, Knoll, and DWR websites. These sites complement the Company’s existing methods of distribution and extend the Company's brands' reach for new and existing customers and clients.
•Wholesale - Through the Company's Global Retail segment, certain products are sold on a wholesale basis to independent retailers located in various markets around the world.
•Retail Locations - As of June 1, 2024, the Company operated 75 retail studios (including 37 operating under the DWR brand, 1 under the HAY brand, 29 Herman Miller stores, 3 Muuto stores, 4 Knoll stores and a multi-brand Chicago store). The business also operated 4 outlet studios.
Challenges Ahead
Like all businesses, the Company is faced with a host of challenges and risks. The Company believes its core strengths and values, which provide the foundation for its strategic direction, have prepared the Company to respond to the inevitable challenges it will face in the future. While the Company is confident in its direction, it acknowledges the risks specific to our business and industry. Refer to Item 1A for discussion of certain of these risk factors and Item 7A for disclosures of market risk.
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Areas of Strategic Focus
Our strategy is designed to harness the full potential of MillerKnoll while driving growth across all business segments, geographies, and customer groups and creating value for all our stakeholders. We will capitalize on global trends including hybrid and flexible work, consumers’ focus on investing in their homes, a focus on health and well-being, and an expectation of corporate social responsibility. Our strategy includes three key focus areas:
Drive Customer Demand and Order Growth
We are prioritizing programs to deliver world class experiences with every client interaction. We have a global, go-to-market framework for contract sellers, Design With Impact, that is organized around well-being, connection and change, and we are investing in MillerKnoll showrooms that bring our brands closer together to show the breadth of our offerings. As part of this work, we are enhancing and opening MillerKnoll showrooms in select markets including, Atlanta, Chicago, Dallas, London, Los Angeles, New York, Toronto and San Francisco. In addition, we will continue to leverage the wide reach of our dealers’ showrooms around the globe.
In retail, we are working to evolve and enhance the Design Within Reach experience. We are testing new store formats, expanding our product assortment and offering design services both in store and online to enhance the customer experience, attract new customers and grow existing customers. In addition, we continue to launch new online tools to support our trade customers making it easier for them to incorporate our products in their client projects.
Foster a Culture of Highly Engaged Associates
As MillerKnoll, we have created one of the most talented teams in the industry. We are committed to nurturing this distinct competitive advantage by fostering a culture of highly engaged associates and inspiring belief in our shared future. We empower our associates to be agile and hold our teams accountable for living our actions and delivering high performance.
Our priorities include offering a seamless MillerKnoll employee experience via a global Human Resources technology platform; delivering an externally competitive and internally equitable compensation and benefits program; growing internal capabilities through development opportunities for all career levels; and investing to make MillerKnoll an employer of choice around the world.
Deliver Value to our Associates and Shareholders
We believe there is opportunity for meaningful long-term growth in each of our business segments. MillerKnoll is uniquely positioned to capitalize on these opportunities given the breadth of our Contract and Global Retail businesses and product portfolios, global reach, and omni-channel distribution and fulfillment capabilities.
Our collective of dynamic brands includes Herman Miller, Knoll, DatesWeiser, Design Within Reach, Edelman Leather, Geiger, HAY, Holly Hunt, Knoll Textiles, Maharam, Muuto, and Spinneybeck Filzfelt. These brands are united in their commitment to our purpose, design for the good of humankind, and they offer a complementary set of design solutions. By leveraging our global operations footprint, we are able to fuel our brands and build solutions in market closer to our customers, and we are creating centers of excellence in our operations facilities to support all brands in each region.
To capitalize on the opportunity ahead, we will seek to lead the industry in product innovation, design excellence, and sustainability; fortify the flagship Knoll and Herman Miller brands while nurturing and growing each of the brands within MillerKnoll; position the Americas Contract business to lead; drive outsized growth in International Contract & Specialty; and continue transforming our Global Retail business.
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Business Overview
The following is a summary of the significant events and items impacting the Company's operations for the year ended June 1, 2024:
•Net sales were $3,628.4 million, representing a decrease of 11.2% when compared to the prior year. The decrease in net sales was primarily driven by decreased sales volumes in all segments, the closure of the Fully business that occurred in the prior year, the closure of the HAY eCommerce channel in North America, as well as the additional week of operations in the prior fiscal year which is required periodically to re-align calendar months with our fiscal periods. These decreases were offset by increased sales resulting from price increases, net of incremental discounting as well as favorable foreign currency translation. On an organic basis, net sales were $3,615.4 million(*), representing a decrease of 8.1% when compared to the prior year.
•Gross margin was 39.1% as compared to 35.0% in the prior year. The change in gross margin was primarily driven by the realization of price and channel optimization strategies, the realization of cost synergies associated with the Knoll acquisition, and reductions in commodities, storage and handling costs and freight and product distribution expenses.
•Operating expenses decreased by $55.4 million or 4.2% as compared to the prior year. The decrease was primarily due to lower variable selling expenses, the continued focus on cost optimization and synergy capture, and restructuring actions announced and implemented during fiscal year 2024. These decreases were partially offset by compensation and benefit costs, which increased approximately $33.0 million driven by changes in variable-based compensation and incentives.
•The integration of the Knoll acquisition continues to progress as planned. We made good progress implementing cost synergies, having achieved an annualized run-rate cost synergies of $160 million related to the integration of Knoll.
•The effective tax rate was 14.8% for fiscal 2024 compared to negative 8.8% for the prior year.
•Diluted earnings per share for the full year totaled $1.11 compared to $0.55 in the prior year. On an adjusted basis(*), diluted earnings per share totaled $2.08 in fiscal 2024 compared to $1.85 in fiscal 2023.
•The Company declared cash dividends of $0.75 per share in both fiscal 2024 and fiscal 2023.
(*) Non-GAAP measurements; see accompanying reconciliations and explanations.
The following summary includes the Company's view on the economic environment in which it operates:
•The current macroeconomic environment in North America — which reflects higher interest rates, tepid housing-related demand trends, and relatively low CEO and consumer confidence levels — continues to pose challenges for the industry. These factors are expected to persist in the near term, posing difficulties particularly for the luxury housing market and discretionary spending on goods. However, within the contract furniture industry, the business is beginning to see improving demand indicators such as increased contract activations and increases in the number and size of new project opportunities entering our sales funnel.
•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 and have been effective in offsetting these cost pressures. Additionally, we began to benefit from relative decreases in steel and other key input costs as fiscal 2024 progressed.
•The Americas Contract segment reported a net sales decrease of 10.0% and an organic sales decrease of 8.3%(*) year-over-year. Operating margin increased 50 basis points year-over year and 100 basis points on an adjusted basis(*). The increase was primarily driven by the combination of gross margin expansion and well managed operating expenses.
•The International Contract & Specialty segment reported a net sales decrease of 8.4% and an organic sales decrease of 7.2%(*) year-over-year. Operating margin decreased 130 basis points year-over-year and 30 basis points on an adjusted basis(*). The decrease was primarily driven by the loss of leverage on lower demand and production levels in the European contract channel and within our Specialty businesses.
•The Global Retail segment reported a net sales decrease of 16.4% and an organic sales decrease of 8.6%(*) year-over-year. Operating margin increased 640 basis points year-over year and 210 basis points on an adjusted basis(*). The increase was primarily driven by pricing actions as well as improvements in inventory management and increased shipping revenues.
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The remaining sections of Item 7 include additional analysis of the fiscal year ended June 1, 2024, including discussion of significant variances compared to the prior year period. A detailed review of our fiscal 2023 performance compared to our fiscal 2022 performance is set forth in Part II, Item 7 of our Form 10-K for the fiscal year ended June 3, 2023.
(*) Non-GAAP measurements; see accompanying reconciliations and explanations.
Reconciliation of Non-GAAP Financial Measures
This presentation 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 presentation. The Company believes these non-GAAP measures are useful for investors as they provide financial information on a more comparative basis for the periods presented.
The non-GAAP financial measures referenced within this presentation include: Adjusted Earnings per Share, Adjusted Operating Earnings (Loss), Adjusted Operating Margin, and Organic Growth (Decline).
Adjusted Earnings per Share represents reported diluted earnings per share excluding the impact from amortization of Knoll purchased intangibles, integration charges, restructuring expenses, impairment charges, and the related tax effect of these adjustments. These adjustments are described further below.
Adjusted Operating Earnings (Loss) represents reported operating earnings plus integration charges, amortization of Knoll purchased intangibles, restructuring expenses, and impairment charges. These adjustments are described further below.
Adjusted Operating Margin represents Adjusted Operating Earnings (Loss) divided by net sales.
Organic Growth (Decline) represents the change in sales and orders, excluding currency translation effects, the impact of an extra week in fiscal 2023, the impact of the closure of the Hay eCommerce channel in North America, and the impact of the closure of the Fully business.
•Amortization of Knoll purchased intangibles: Includes expenses associated with the 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 Knoll purchased intangibles as such non-cash amounts were significantly impacted by the size of the Knoll acquisition. Furthermore, we believe that this adjustment enables better comparison of our results as Amortization of Knoll 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 Knoll 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.
•Integration charges: Knoll integration-related costs include severance, accelerated stock-based compensation expenses, asset impairment charges, and expenses related to synergy realization efforts and reorganization initiatives.
•Restructuring charges: Includes costs associated with actions involving targeted workforce reductions and non-cash charges for the impairment of assets associated with the decision to close certain showrooms.
•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 as well as impairment of the Knoll and Muuto trade names.
•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 table reconciles Operating Earnings (Loss) to Adjusted Operating Earnings (Loss) by Segment for the years ended as indicated below (in millions):
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Three Months Ended Twelve Months Ended
Americas Contract
Adjustments
International Contract & Specialty
Adjustments
Global Retail
Adjustments
Integration charges — — % — — % — — % 0.2 — %
Corporate
Operating expenses $ 11.9 — % $ 16.1 — % $ 52.1 — % $ 60.4 — %
Operating (loss) $ (11.9) — % $ (16.1) — % $ (52.1) — % $ (60.4) — %
Adjustments
Integration charges — — % 1.3 — % 0.1 — % 5.6 — %
Adjusted operating (loss) $ (11.9) — % $ (14.8) — % $ (52.0) — % $ (54.8) — %
MillerKnoll, Inc.
Adjustments
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The following table reconciles net sales to organic net sales for the years ended as indicated below (in millions):
Twelve Months Ended
Americas Contract International Contract & Specialty Global Retail Total
Adjustments
Currency translation effects (1) (2.6) (6.3) (4.1) (13.0)
% change from PY (8.3) % (7.2) % (8.6) % (8.1) %
Twelve Months Ended
Americas Contract International Contract & Specialty Global Retail Total
Adjustments
Fully and HAY eCommerce — — (76.0) (76.0)
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The following tables reconcile orders as reported to organic orders for the periods ended as indicated below (in millions):
Twelve Months Ended
Americas Contract International Contract & Specialty Global Retail Total
% change from PY (4.0) % (1.7) % (12.2) % (5.6) %
Adjustments
Currency translation effects (1) (7.7) (7.4) (5.0) (20.1)
% change from PY (2.6) % (0.5) % (3.7) % (2.3) %
Twelve Months Ended
Americas Contract International Contract & Specialty Global Retail Total
Adjustments
Fully and HAY eCommerce — — (75.8) (75.8)
The following table reconciles EPS to Adjusted EPS for the years ended as of indicated below:
Twelve Months Ended
(Loss) Earnings per Share - Diluted $ 1.11 $ 0.55
Add: Amortization of Knoll purchased intangibles 0.32 0.33
Add: Integration charges 0.31 0.24
Add: Restructuring charges 0.42 0.45
Add: Impairment charges 0.24 0.76
Tax impact on adjustments (0.32) (0.48)
Adjusted earnings per share - diluted $ 2.08 $ 1.85
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Financial Results
The following is a comparison of our annual results of operations and year-over-year percentage changes for the periods indicated:
(Dollars in millions) Fiscal 2024 Fiscal 2023 % Change
Earnings before income taxes and equity income 99.7 51.4 94.0 %
Equity (loss) from nonconsolidated affiliates, net of tax (0.4) (0.8) (50.0) %
Net earnings attributable to MillerKnoll, Inc. $ 82.3 $ 42.1 95.5 %
The following table presents, for the periods indicated, the components of the Company's Consolidated Statements of Comprehensive Income as a percentage of Net sales:
Operating expenses 34.5 % 32.0 %
Operating earnings 4.6 % 3.0 %
Other expenses, net 1.9 % 1.7 %
Earnings before income taxes and equity income 2.7 % 1.3 %
Income tax expense 0.4 % 0.1 %
Equity (loss) income from nonconsolidated affiliates, net of tax — % — %
Net earnings 2.3 % 1.1 %
Net earnings attributable to redeemable noncontrolling interests 0.1 % 0.1 %
Net earnings attributable to MillerKnoll, Inc. 2.3 % 1.0 %
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Net Sales
The following chart presents graphically the primary drivers of the year-over-year change in Net sales. The amounts presented in the bar graph are expressed in millions and have been rounded.
Net sales decreased $459 million or 11.2% compared to the prior year fiscal period. The following items primarily contributed to the change:
•Decreased sales volume within the Americas Contract, International Contract & Specialty and Global Retail segments of approximately $262 million, $76 million and $61 million, respectively.
•The additional week during the first quarter of the prior year contributed to approximately $77 million of the Net sales decrease.
•Decrease of $76 million related to the closure of the Fully business that occurred in the prior year and the closure of the Hay eCommerce channel in North America. Offset in part by:
•Price increases, net of incremental discounting, which drove an increase in Net sales of approximately $80 million.
•Foreign currency translation increased Net sales by approximately $13 million.
Gross Margin
Gross margin was 39.1% for fiscal 2024 as compared to 35.0% for fiscal 2023. The following factors summarize the major drivers of the year-over-year change in gross margin percentage:
•Reduction in costs from commodities, storage and handling costs, freight and product distribution costs, as compared to the prior year which increased gross margin by approximately 260 basis points.
•The positive impact of price increases, net of incremental discounting, contributed to margin improvement by approximately 140 basis points.
•Charges in the prior year for the impairment of assets associated with the decision to cease operating Fully as a stand-alone brand contributed to an increase in gross margin of approximately 40 basis points.
•Benefit to margin from the realization of incremental synergies associated with the Knoll acquisition as compared to the same period in the prior year. These factors were offset in part by;
•Loss of leverage on lower sales volumes and unfavorable channel and product mix, which negatively impacted gross margin by approximately 70 basis points.
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Operating Expenses
The following chart presents graphically the primary drivers of the year-over-year change in Operating expenses. The amounts presented in the bar graph are expressed in millions and have been rounded.
Operating expenses decreased by $56 million or 4.3% compared to the prior year fiscal period. The following factors contributed to the change:
•Variable selling and marketing costs decreased by approximately $34 million, due in part to the closure of the Fully business that occurred in the prior year;
•Decrease in asset impairment charges recorded in the current year as compared to the prior year contributed a net decrease in Operating expenses of approximately $24 million;
•The impact of an extra week in the first quarter of fiscal 2023 decreased Operating expenses by approximately $10 million;
•Product development costs decreased approximately $3 million, primarily in the Americas Contract segment; and
•Savings from the realization of incremental synergies associated with the Knoll acquisition as compared to the prior year as well as reduced expenses attributable to the recently implemented restructuring actions. These decreases were offset in part by:
•Compensation and benefit costs, which increased approximately $33 million driven by changes in variable-based compensation and incentives.
Other Income/Expense
Net other expenses for fiscal 2024 were $67.5 million compared to $70.9 million in fiscal 2023. This change is driven primarily by increased interest income in the current year of $3.3 million, the impact of net foreign currency transaction gains of $1.8 million as well as favorable net periodic benefit income from our pension plans. These favorable changes were offset by increased Interest expense of $2.2 million as compared to the same period of the prior year, driven by increased interest rates as compared to the same period of the prior year.
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Income Taxes
See Note 11 of the Consolidated Financial Statements for additional information.
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Operating Segments Results
The business is comprised of various operating segments as defined by U.S. GAAP. 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 include Americas Contract, International Contract & Specialty, and Global Retail. The Company also reports a “Corporate” category consisting primarily of unallocated expenses related to general corporate functions, including, but not limited to, certain legal, executive, corporate finance, information technology, administrative and acquisition-related costs. For descriptions of each segment, refer to Note 14 of the Consolidated Financial Statements.
The charts below present the relative mix of net sales and operating earnings across each of the Company's segments. This is followed by a discussion of the Company's results, by segment.
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Americas Contract
(Dollars in millions) Fiscal 2024 Fiscal 2023 Change
Operating earnings % 5.4 % 4.9 % 0.5 %
Net sales decreased 10.0%, or 8.3%(*) on an organic basis, from the prior year due to:
•Decreased sales volume within the segment of approximately $262 million, which was driven by the impact of a challenging macro-economic environment compounded by pandemic-driven pent-up demand at the start of the prior year; and
•The impact of an additional week in the prior year, which reduced sales approximately $39 million; offset in part by
•Price increases, net of incremental discounting, of approximately $97 million; and
•Favorable foreign currency translation of approximately $3 million.
Operating earnings decreased $0.9 million, or 0.9% compared to the same period of the prior year due to:
•Increased operating expenses of $9.9 million. The following factors contributed to the change:
◦An increase in variable based compensation of approximately $19 million;
◦Increased Knoll acquisition integration costs of $9 million; and
◦Increased restructuring expenses of approximately $2 million related to a workforce reduction as well as showroom consolidations. These increases were offset in part by:
◦Decreased product development costs of $3 million as well as a decrease of $5 million due to the additional week in the prior year;
◦A decrease of $6 million in non-cash intangible impairment charges as compared to the prior year;
◦Decreased variable marketing and selling costs.
•The increase in operating expenses was offset in part by improved gross margin of $9.0 million due to the increased gross margin percentage of 380 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 370 basis points; and
◦Decreased commodity and product distribution costs that increased gross margin percentage by 200 basis points. These increases were offset in part by:
◦Unfavorable product mix which had a negative impact on margin of 170 basis points and increased labor costs as well as loss of fixed cost leverage due to reduced production volumes that decreased gross margin percentage by 20 basis points.
(*) Non-GAAP measurements; see accompanying reconciliations and explanations.
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International Contract & Specialty
(Dollars in millions) Fiscal 2024 Fiscal 2023 Change
Operating earnings % 8.4 % 9.7 % (1.3) %
Net sales decreased 8.4%, or 7.2%(*) on an organic basis, from the prior year due to:
•Decline in sales volume of approximately $76 million driven mainly by challenging macroeconomic conditions in Europe and parts of Asia-Pacific; and
•Impact of the extra week in the prior year period, which drove a decrease of $20 million; offset in part by
•Favorable foreign currency translation of approximately $6 million; and
•Price increases, net of incremental discounting of $4 million.
Operating earnings decreased $20.4 million, or 20.7%, compared to the prior year due to:
•Decreased Gross margin of $14.7 million due to the decrease in sales explained above, offset in part by an increase in gross margin percentage of 230 basis points due primarily to favorable product mix.
•Increased Operating expenses of $5.7 million which was largely due to an:
◦Increased variable compensation costs in the current year of $10 million; and
◦Increased restructuring, integration and impairment charges of $8 million in the current year. Restructuring charges were related to workforce reductions and the increase in impairment charges was primarily related to the impairment of the Muuto trade name in the current year. These increases were offset in part by:
◦Decrease of $4 million due to the additional week in the prior year as well as a decrease of $8 million primarily related to a reduction in variable selling costs.
(*) Non-GAAP measurements; see accompanying reconciliations and explanations.
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Global Retail
(Dollars in millions) Fiscal 2024 Fiscal 2023 Change
Operating earnings (loss) % 4.9 % (1.5) % 6.4 %
Net sales decreased 16.4% as reported and 8.6%(*) on an organic basis, from the prior year due to:
•Decreased sales of $76 million primarily related to the closure of the Fully business that occurred in the prior year as well as the closure of the Hay eCommerce channel in North America;
•Decreased sales volumes of approximately $61 million driven by a slowdown in the North American housing market and a continuation of general economic uncertainty;
•Incremental promotional discounting, net of price increases, which decreased sales by $21 million; and
•The additional week during the first quarter of the prior year contributed to approximately $18 million of the net sales decrease; offset by
•Favorable foreign currency translation of approximately $4 million.
Operating earnings increased $57.9 million, or 373.5% over the prior year due to:
•An increase in gross margin percentage of 690 basis points attributable to the favorable impact of reduced costs as compared to the prior year associated with product distribution and inventory handling as well as charges in the prior year for the impairment of assets associated with the decision to cease operating Fully as a stand-alone brand. These increases were offset in part by promotional discounting, net of price increases.
•Decreased Operating expenses of $63 million driven by:
◦Decreased selling and marketing costs including the reduction in costs associated with no longer operating Fully as a stand alone brand, which contributed an approximate decrease of $28 million;
◦Decrease of $21 million in expenses primarily related to charges in the prior year for the impairment of assets associated with the decision to cease operating Fully as a stand-alone brand;
◦Decreased restructuring charges of approximately $8 million relating to the decision to cease operating Fully as a stand-alone brand in fiscal year 2023; and
◦Decrease of $4 million due to the additional week in the prior year, as well as a general decrease in operating expenses associated with the closure of the Fully business in the prior year. These decreases were offset by:
◦Increase of $3 million in variable compensation costs in the current year.
(*) Non-GAAP measurements; see accompanying reconciliations and explanations.
Corporate
Corporate unallocated expenses totaled $52.1 million for fiscal 2024, a decrease of $8.3 million from fiscal 2023. The decrease was driven primarily by a decrease in integration costs related to the Knoll acquisition of $5.5 million.
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Liquidity and Capital Resources
The table below summarizes the net change in cash and cash equivalents for the fiscal years indicated.
Fiscal Year Ended
Cash provided by (used in):
Investing activities (86.3) (76.5)
Effect of exchange rate changes (0.3) (6.4)
Net change in cash and cash equivalents $ 6.9 $ (6.8)
Cash Flow — 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 twelve months ended June 1, 2024 totaled $352.3 million compared to $162.9 million in the twelve months ended June 3, 2023. The increase in cash inflow is due primarily to an increase in earnings of $38.5 million in the current year compared to the prior year, a reduction in contributions to our pension plans, as well as a reduction in working capital. Our working capital consists primarily of receivables from customers, inventory, prepaid expenses, accounts payable, accrued compensation, and accrued other expenses. The following all affect these account balances:
•The timing of collection of our receivables;
•Effective inventory management resulting in reduced inventory levels; and
•Changes in accruals related to variable compensation.
Cash Flow — Investing Activities
Cash used in investing activities for the twelve months ended June 1, 2024 was $86.3 million, as compared to $76.5 million in the twelve months ended June 3, 2023. The increase in cash outflow in the current year was primarily due to:
•An increase in notes receivable received from certain independently owned dealers in the current year;
•The advancement of $13.5 million of cash against the value of company owned life insurance policies received in the twelve months ended June 3, 2023 for which there was no activity in the current year. Offset in part by:
•Proceeds of $3.5 million received in the twelve months ended June 1, 2024 related to the sale of the Company's investment in Global Holdings Netherlands B.V.
Capital expenditures for the current year were $78.4 million as compared to $83.3 million in the prior year. At the end of the fiscal 2024, there were outstanding commitments for capital purchases of $53.7 million. The Company plans to fund these commitments with cash on hand and/or cash generated from operations. The Company expects capital spending in fiscal 2025 to be between $100 million and $125 million, which will be primarily related to investments in the Company's facilities, (including manufacturing, showrooms, and retail stores) and equipment as well as investments associated with achieving the Company's sustainability goals.
Cash Flow — Financing Activities
Cash used in financing activities for the twelve months ended June 1, 2024 was $258.8 million, compared to $86.8 million in the twelve months ended June 3, 2023. The increase in cash used in the current year, compared to the prior year, was primarily due to:
•The Company repurchased 6,022,646 shares at a cost of $138.2 million in the current year as compared to 575,207 share repurchases totaling $16.0 million in the prior year; and
•Net payments on the credit agreement of $36.7 million in the current year compared to net borrowings of $13.7 million in the prior year; and
•Repayments of long-term debt of $31.3 million in the current year compared to $26.3 million in the prior year.
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Sources of Liquidity
The Company has taken actions to safeguard its capital position in the current environment. The Company is closely managing spending levels, capital investments, and working capital.
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 fiscal 2024, the Company has a well-positioned balance sheet and liquidity profile. The Company has access to liquidity through credit facilities as well as cash and cash equivalents. These sources have been summarized below. For additional information, refer to Note 6 to the Consolidated Financial Statements.
Cash and cash equivalents $ 230.4 $ 223.5
Availability under revolving lines of credit(1) 322.3 284.2
(1) Available access to our revolving line of credit is subject to covenant restrictions outlined in our credit agreement.
Of the cash and cash equivalents noted above at the end of fiscal 2024, the Company had $218.5 million of cash and cash equivalents held outside the 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 of June 1, 2024, the total debt outstanding related to borrowings under the syndicated revolving line of credit was $390.0 million with available borrowings against this facility of $322.3 million.
The Company intends to repatriate $114.9 million of undistributed foreign earnings, all of which is held in cash in certain foreign jurisdictions. The Company has recorded a $3.7 million deferred tax liability related to foreign withholding taxes on these future dividends received in the U.S. from foreign subsidiaries. A significant portion of the $114.9 million of undistributed foreign earnings was previously taxed under the U.S. Tax Cut and Jobs Act (TCJA). The Company intends to remain indefinitely reinvested in the remaining undistributed earnings outside the U.S. which is estimated to be approximately $347.5 million on June 1, 2024.
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, upcoming debt maturities, future dividends and share repurchases, subject to financing availability in the marketplace.
Contingencies
The Company is involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such proceedings and litigation currently pending will not materially affect the Company's Consolidated Financial Statements. Refer to Note 13 of the Consolidated Financial Statements for more information relating to contingencies.
Basis of Presentation
The Company's fiscal year ends on the Saturday closest to May 31. The fiscal year ended June 1, 2024 contained 52 weeks, the fiscal year ended June 3, 2023 contained 53 weeks, and the fiscal year ended May 28, 2022 contained 52 weeks.
Contractual Obligations
Contractual obligations associated with our ongoing business and financing activities will result in cash payments in future periods. The following table summarizes the amounts and estimated timing of these future cash payments. Further information regarding debt obligations can be found in Note 6 of the Consolidated Financial Statements. Additional information related to operating leases can be found in Note 7 of the Consolidated Financial Statements.
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Payments due by fiscal year
Pension and other post employment benefit plans funding (2) 6.4 5.9 0.1 0.1 0.3
Stockholder dividends (3) 13.2 13.2 — — —
(1) Includes the current portion of long-term debt. Contractual cash payments on long-term debt obligations are disclosed herein based on the amounts borrowed as of June 1, 2024 and the maturity date of the underlying debt. Estimated future interest payments on our outstanding interest-bearing debt obligations are based on interest rates as of June 1, 2024. Actual cash outflows may differ significantly due to changes in borrowings or interest rates.
(2) Pension plan funding commitments are known for a 12-month period for those plans that are funded; unfunded pension and post-retirement plan funding amounts are equal to the estimated benefit payments. As of June 1, 2024, the total projected benefit obligation for our domestic and international employee pension benefit plans was $207.1 million.
(3) Represents the dividend payable as of June 1, 2024. Future dividend payments are not considered contractual obligations until declared.
(4) Other contractual obligations primarily represent long-term commitments related to deferred and supplemental employee compensation benefits, and other post-employment benefits.
Critical Accounting Policies and Estimates
Our goal is to report financial results clearly and understandably. We follow accounting principles generally accepted in the United States in preparing our Consolidated Financial Statements, which require us to make certain estimates and apply judgments that affect our financial position and results of operations. We continually review our accounting policies and financial information disclosures. These policies and disclosures are reviewed at least annually with the Audit Committee of the Board of Directors.
We believe that of our significant accounting policies, which are described in Note 1 of our consolidated financial statements, the following accounting policies and specific estimates involve a greater degree of judgment and complexity.
Business Combinations
Accounting for business combinations requires us to make significant estimates and assumptions, especially at the acquisition date with respect to tangible and intangible assets acquired and liabilities assumed and pre-acquisition contingencies. We use our best estimates and assumptions to accurately assign fair values to the tangible and intangible assets acquired and liabilities assumed at the acquisition date as well as the useful lives of those acquired intangible assets.
We allocate the fair value of purchase consideration to tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is allocated to goodwill. The allocation of the purchase consideration requires management to make significant estimates and assumptions, especially with respect to intangible assets. These estimates are reviewed with our advisors and can include, but are not limited to:
•future expected cash flows from acquired customer relationships and trade names,
•assumed royalty rates that could be payable if we did not own the trademarks, and
•discount rates.
Our estimates of fair value are based upon reasonable assumptions but are inherently uncertain and unpredictable, and as a result, actual results may differ from these estimates. During the measurement period, which is up to one year from the acquisition date, we may record adjustments to the values of assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings. During fiscal 2022, management considered the acquisition of Knoll a material acquisition. There were no material acquisitions during fiscal 2024 or fiscal 2023. See Note 3 to the Consolidated Financial Statements for more information.
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Goodwill and Indefinite-lived Intangibles
We perform our annual impairment assessment for goodwill and other indefinite-lived intangible assets each year as of March 31 or more frequently if events or changes in circumstances indicate an impairment might be possible. We may consider qualitative factors to assess if it is more likely than not that the fair value for goodwill or indefinite-lived intangible assets is below the carrying amount. We may also elect to bypass the qualitative assessment and perform a quantitative assessment.
When the Company performs a quantitative assessment, the Company makes estimates about fair value by using a weighting of the income approach and the market approach. The income approach is based on projected discounted cash flows using a market participant discount rate. The market approach is based on financial multiples of companies comparable to each reporting unit and applies a control premium. We corroborate the fair value through a market capitalization reconciliation to determine if the implied control premium is reasonable based on the qualitative considerations, such as recent market transactions.
The Company believes its assumptions for assessing the impairment of its long-lived assets, goodwill and indefinite-lived trade names are reasonable, but future changes in the underlying assumptions could occur due to the inherent uncertainty in making such estimates.
Further declines in the Company’s operating results due to challenging economic conditions, an unfavorable industry or macroeconomic development or other adverse changes in market conditions could change one of the key assumptions the Company uses to calculate the fair value of its long-lived assets, goodwill and indefinite-lived trade names, which could result in a further decline in fair value and require the Company to record an impairment charge in future periods.
Goodwill
Certain business acquisitions have resulted in the recording of goodwill. At June 1, 2024 and June 3, 2023, we had goodwill recorded within the Consolidated Balance Sheets of $1,226.3 million and $1,221.7 million, respectively.
Goodwill is tested for impairment at the reporting unit level annually, or more frequently, when events or changes in circumstances indicate that the fair value of a reporting unit has more likely than not declined below its carrying value. When testing goodwill for impairment, the Company may first assess qualitative factors. If an initial qualitative assessment identifies that it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value, additional quantitative testing is performed. The Company may also elect to bypass the qualitative testing and proceed directly to the quantitative testing. If the quantitative testing indicates that goodwill is impaired, the carrying value of goodwill is written down to fair value.
Each of the reporting units was reviewed for impairment using a qualitative assessment as of March 31, 2024. The Company elected to test each reporting unit, with the exception of the Global Retail reporting unit, qualitatively, as is permitted under ASU 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment. For the Global Retail reporting unit, the Company elected to proceed directly to the quantitative test. No goodwill impairment charges were recorded in fiscal 2024, 2023, or 2022.
The Company performed the quantitative impairment analysis of the Global Retail reporting unit as of March 31, 2024 to determine the fair value of the Global Retail reporting unit as compared to the carrying value. The Company utilized a weighting of the income approach and the market approach to estimate the fair value of the Global Retail reporting unit.
The test for impairment requires the Company to make several estimates about fair value, most of which are based on projected future cash flows and market valuation multiples. We estimated the fair value of the Global Retail reporting unit using a discounted cash flow analysis. The discounted cash flow analysis used the present value of projected cash flows and a residual value.
The Company employed a market-based approach in selecting the discount rate used in our analysis. The discount rate selected represents the market rate of return equal to what the Company believes a reasonable investor would expect to achieve on investments of similar size to the Global Retail reporting unit. The Company believes the discount rate selected in the quantitative assessment is appropriate in that it exceeds the estimated weighted average cost of capital for our business as a whole. The results of the impairment test are sensitive to changes in the discount rates and changes in the discount rate may result in future impairment.
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In performing the quantitative impairment test, the Company determined that the fair value of the Global Retail reporting unit exceeded the carrying amount and, as such, the reporting unit was not impaired. The Company determined that the Global Retail reporting unit exceeded its carrying value by 37% and therefore does not have a heightened risk of future impairments if any assumptions, estimates or market factors change in the future.
The Company evaluated the sensitivity of changes in forecasted sales, operating margin and the discount rate for the Global Retail reporting unit. Reducing the Global Retail reporting unit's forecasted sales by 5% in all years, and leaving all other assumptions static, would not result in impairment. A decrease in the operating margin of 100 basis points in all years would not result in impairment. An increase in the discount rate of 100 basis points would not result in impairment.
Indefinite-lived Intangible Assets
Certain business acquisitions have resulted in the recording of trade names as indefinite-lived intangible assets, which are not amortized. At June 1, 2024 and June 3, 2023, the Company held trade name assets with a carrying value of $465.5 million and $480.7 million, respectively.
The Company evaluates indefinite-lived trade name intangible assets for impairment using a qualitative assessment annually. The Company also tests for impairment using a quantitative assessment if events and circumstances indicate that it is more likely than not that the fair value of an indefinite-lived intangible asset is below its carrying amount. An impairment charge is recorded if the carrying amount of an indefinite-lived intangible asset exceeds the estimated fair value on the measurement date.
In fiscal 2024, the Company performed quantitative assessments in testing the Knoll product brand and Muuto brand indefinite-lived intangible assets for impairment, which resulted in the carrying values of the trade names exceeding their fair values by $8.9 million and $7.9 million, respectively. Accordingly, impairment charges of $16.8 million in total were recognized. The carrying value of the Knoll trade name as of the measurement date was $153.3 million and the fair value of the Knoll trade name as of the measurement date was $144.4 million. The carrying value of the Muuto trade name as of the measurement date was $88.4 million and the fair value of the Muuto trade name as of the measurement date was $80.5 million. If the residual cash flows related to these trade names were to decline in future periods, the Company may need to record additional impairment charges.
In completing our annual indefinite-lived trade name impairment test, the respective fair values were estimated using a relief-from-royalty approach, which requires assumptions related to the following:
•forecasted revenue growth rate,
•assumed royalty rates that could be payable if we did not own the trademark, and
•a market participant discount rate based on a weighted-average cost of capital.
The assumptions used reflect management’s best estimates; however, actual results could differ from our estimates. In completing our annual indefinite-lived trade name impairment test, the fair values of the Knoll and Muuto trade names were both estimated using a discount rate of 12.0%. The royalty rates used for the Knoll and Muuto trade names were 2.0% and 4.5%, respectively. The long-term growth rates in the valuation of the Knoll and Muuto trade names were 2.5% and 3.0%, respectively. The Company’s estimates of the fair value of its Knoll and Muuto indefinite-lived intangible assets are sensitive to changes in the key assumptions above as well as projected financial performance. Therefore, a sensitivity analysis was performed on certain key assumptions.
For the Knoll trade name, keeping all other assumptions constant, a 10% decrease in forecasted sales at March 31, 2024 would have resulted in $14.0 million of additional pre-tax impairment charges; a decrease in the royalty rate of 25 basis points would have resulted in an additional $18.0 million of impairment charges; and a 100 basis point increase in the discount rate would have resulted in an additional $14.0 million of impairment charges.
For the Muuto trade name, keeping all other assumptions constant, a 10% decrease in forecasted sales at March 31, 2024 would have resulted in $8.0 million of additional pre-tax impairment charges; a decrease in the royalty rate of 25 basis points would have resulted in an additional $4.5 million of impairment charges; and a 100 basis point increase in the discount rate would have resulted in an additional $8.0 million of impairment charges.
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During fiscal 2023, the Company determined through a qualitative assessment that the Knoll trade name carrying value was more than likely above its fair value. As a result, the Company performed a quantitative assessment to determine the fair value and as a result recognized a $19.7 million non-cash impairment charge to the indefinite-lived trade name. The carrying value of the Knoll trade name as of the measurement date was $173.0 million. The fair value of the Knoll trade name as of the measurement date was $153.3 million.
The assumptions used reflect management’s best estimates; however, actual results could differ from our estimates. In completing our annual indefinite-lived trade name impairment tests, the fair value of the Knoll trade name was estimated using a discount rate of 12.0%, royalty rate of 2.0% and long-term growth rate of 2.5%. The Company’s estimates of the fair value of its Knoll indefinite-lived intangible asset are sensitive to changes in the key assumptions above as well as projected financial performance. Therefore, a sensitivity analysis was performed on certain key assumptions.
If the estimated cash flows related to the Company's indefinite-lived intangibles were to decline in future periods, the Company may need to record additional impairment charges.
Long-lived Assets
The Company evaluates other long-lived assets and acquired business units for indicators of impairment when events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. If such indicators are present, the future undiscounted cash flows attributable to the asset group are compared to the carrying value of the asset or asset group. The judgments regarding the existence of impairment are based on market conditions, operational performance, and estimated future cash flows. If the carrying value of a long-lived asset is considered impaired, an impairment charge is recorded to adjust the asset to its estimated fair value.
In the fourth quarter of fiscal 2024, the decision was made to cease the use of certain leased locations resulting in impairment charges of $5.5 million recognized for the right of use assets associated with these locations. In the second quarter of fiscal 2024, a manufacturing facility located in Wisconsin met the criteria to be classified as an asset held for sale. The decision to sell this facility was made as a result of facility integration activities performed in connection with the integration of Knoll. In the fourth quarter of fiscal 2024, it was determined that the carrying value of these assets exceeded their fair value and an impairment charge of $1.0 million was recognized. The carrying amount of these assets held for sale was $3.5 million and is classified as current assets within "Assets held for sale" in the Condensed Consolidated Balance Sheets as of June 1, 2024.
During fiscal 2023, the decision was made to cease operating Fully as a stand-alone brand and sales channel and instead sell certain Fully products through other channels already existing within the Global Retail business. Management identified this decision as an indicator of impairment, and accordingly recorded impairment of certain long-lived assets within the Fully asset group of $21.5 million.
In fiscal 2022, the Company recorded a non-cash impairment charge of $15.5 million related to the discontinued use of a long-lived asset that was a direct result of integration activities associated with the Knoll acquisition.
The Company believes its assumptions for assessing the impairment of its long-lived assets, goodwill and indefinite-lived trade names are reasonable, but if actual results are not consistent with management's estimates and assumptions, a material impairment charge could occur, which could have a material adverse effect on our consolidated financial statements.
New Accounting Standards
Refer to Note 1 of the Consolidated Financial Statements for information related to new accounting standards.
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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 of MillerKnoll or the price of MillerKnoll’s stock. These forward-looking statements involve certain risks and uncertainties, many of which are beyond MillerKnoll’s control, that could cause actual results to differ materially from those indicated in such forward-looking statements, including but not limited to: global and national economic conditions including heightened inflation, uncertainty regarding future interest rates, foreign currency exchange rate fluctuations, escalating tensions in the Middle East, the continuation of the Russia-Ukraine war, and potential governmental responses to these events; the impact of any government policies and actions to protect the health and safety of individuals or to maintain the functioning of national or global economies, and the Company's response to any such policies and actions; 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 Knoll acquisition on the ability of MillerKnoll to retain and hire key personnel and maintain relationships with customers, suppliers and others with whom MillerKnoll does business, or on MillerKnoll’s operating results and business generally; the ability to successfully integrate Knoll’s operations; the ability of MillerKnoll to implement its plans, forecasts and other expectations with respect to MillerKnoll’s business after the completion of the Knoll acquisition and realize expected synergies; 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 to MillerKnoll’s periodic reports and other filings with the SEC, including the risk factors identified in this report. 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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Item 7A Quantitative and Qualitative Disclosures About Market Risk
The Company manufactures, markets, and sells its products throughout the world and, as a result, is subject to changing economic conditions, which could reduce the demand for its products.
Direct Material Costs
The Company is exposed to risks arising from price changes for certain direct materials and assembly components used in its operations. The largest of such costs incurred by the Company are for steel, plastics, textiles, wood particleboard and aluminum components. The impact from changes in all commodity prices decreased the Company's costs by approximately $10.8 million during fiscal 2024 compared to the prior year primarily due to decreased steel and aluminum costs offset in part by increased plastic costs. The impact from changes in commodity prices decreased the Company's costs by approximately $3.5 million during fiscal 2023 as compared to fiscal 2022. Note that these changes include the impact of Chinese tariffs on the Company's direct material costs.
The market prices for commodities will fluctuate over time and the Company acknowledges that such changes are likely to impact its costs for key direct materials and assembly components. Consequently, it views the prospect of such changes as an outlook risk to the business.
Significant increases in raw materials can be difficult to offset with price increases due to existing contractual agreements with customers as well as difficulty finding effective financial instruments to hedge these changes. Our profitability could be negatively impacted in the long term if we are not able to pass along higher raw material costs to our customers.
Foreign Exchange Risk
The Company primarily manufactures its products in the United States, United Kingdom, Canada, China, Italy, India, Mexico and Brazil. It also sources completed products and product components from outside the United States. The Company's completed products are sold in numerous countries around the world. Sales in foreign countries as well as certain expenses related to those sales are transacted in currencies other than the Company's reporting currency, the U.S. dollar. Accordingly, production costs and profit margins related to these sales are affected by the currency exchange relationship between the countries where the sales take place and the countries where the products are sourced or manufactured. These currency exchange relationships can also impact the Company's competitive positions within these markets.
In the normal course of business, the Company enters into contracts denominated in foreign currencies. The principal foreign currencies in which the Company conducts its business are the British pound sterling, euro, Canadian dollar, Japanese yen, Mexican peso, Hong Kong dollar, Chinese renminbi, and the Danish krone. As of June 1, 2024, the Company had outstanding 21 forward currency instruments designed to offset either net asset or net liability exposure that is denominated in non-functional currencies.
(In millions, except number of forward contracts)
Net Asset Exposure
Currency Number of Forward Contracts Net Exposure
Net Liability Exposure
Currency Number of Forward Contracts Net Exposure
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As of June 3, 2023, the Company had outstanding 35 forward currency instruments designed to offset either net asset or net liability exposure that is denominated in non-functional currencies.
(In millions, except number of forward contracts)
Net Asset Exposure
Currency Number of Forward Contracts Net Exposure
Net Liability Exposure
Currency Number of Forward Contracts Net Exposure
The cost of the foreign currency hedges and remeasuring all foreign currency transactions into the appropriate functional currency resulted in a net gain of $3.0 million in fiscal 2024 compared to net gain of $4.8 million in fiscal 2023 included in net earnings. These amounts are included in Other (income) expense, net in the Consolidated Statements of Comprehensive Income. Additionally, the cumulative effect of translating the balance sheet and income statement accounts from the functional currency into the United States dollar increased the accumulated comprehensive loss component of total stockholders' equity by $8.3 million compared to a decrease of $20.1 million as of the end of fiscal 2024 and 2023, respectively.
Interest Rate Risk
The Company enters into interest rate swap agreements to manage its exposure to interest rate changes and its overall cost of borrowing. The Company's interest rate swap agreements were entered into to exchange variable rate interest payments for fixed rate payments over the life of the agreement without the exchange of the underlying notional amounts. The notional amount of the interest rate swap agreements is used to measure interest to be paid or received and does not represent the amount of exposure to credit loss. The differential paid or received on the interest rate swap agreements is recognized as an adjustment to interest expense.
These interest rate swap derivative instruments are held and used by the Company as a tool for managing interest rate risk. They are not used for trading or speculative purposes. The counterparties to the swap instruments are large financial institutions that the Company believes are of high-quality creditworthiness. While the Company may be exposed to potential losses due to the credit risk of non-performance by these counterparties, such losses are not anticipated.
In September 2016, the Company entered into an interest rate swap agreement. The interest rate swap is for an aggregate notional amount of $150.0 million with a forward start date of January 3, 2018 and a termination date of January 3, 2028. As a result of the transaction, the Company effectively converted the interest rate on indebtedness anticipated to be borrowed on its revolving line of credit up to the notional amount from a LIBOR-based floating interest rate plus applicable margin to a 1.949% fixed interest rate plus applicable margin as of the forward start date. The swap agreement was amended in February 2023 for each calculation period beginning on February 3, 2023, and thereafter, to replace the LIBOR-based floating interest rate with a Term SOFR rate, and a 1.910% modified fixed interest rate.
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In June 2017, the Company entered into a second interest rate swap agreement. The interest rate swap is for an aggregate notional amount of $75.0 million with a forward start date of January 3, 2018 and a termination date of January 3, 2028. As a result of the transaction, the Company effectively converted the interest rate on indebtedness anticipated to be borrowed on its revolving line of credit up to the notional amount from a LIBOR-based floating interest rate plus applicable margin to a 2.387% fixed interest rate plus applicable margin under the agreement as of the forward start date. The swap agreement was amended in February 2023 for each calculation period beginning on February 3, 2023, and thereafter, to replace the LIBOR-based floating interest rate with a Term SOFR rate, and a 2.348% modified fixed interest rate.
In January 2022, the Company entered into a third interest rate swap agreement. The interest rate swap is for an aggregate notional amount of $575.0 million with a forward start date of January 31, 2022 and a maturity date of January 29, 2027. The interest rate swap locked in the Company’s interest rate on forecasted outstanding borrowings of $575.0 million at 1.689% exclusive of the credit spread on the variable rate debt. The Company effectively will convert LIBOR-based floating interest rate plus applicable margin indebtedness to a 1.689% fixed interest rate plus applicable margin under the agreement as of the forward start date. The swap agreement was amended in February 2023 for each calculation period beginning on January 31, 2023, and thereafter, to replace the LIBOR-based floating interest rate with a Term SOFR rate, and a 1.650% modified fixed interest rate.
In February 2023, the Company entered into a fourth interest rate swap agreement. The interest rate swap is for an aggregate notional amount of $150.0 million with a forward start date of March 3, 2023 and a termination date of January 3, 2029. As a result of the transaction, under the terms of the agreement the Company effectively will convert one month Spread Adjusted Term SOFR floating interest rate plus applicable margin to 3.950% fixed interest rate and adjustment percentage plus applicable margin as of the forward start date. "Spread Adjusted Term SOFR" means Term SOFR plus an adjustment percentage that varies with tenor. The Company typically selects a one month tenor that is calculated as the one month Term SOFR rate plus 0.11448%.
The fair market value of the effective interest rate swap instruments was a net asset of $61.7 million and $56.9 million as of June 1, 2024 and June 3, 2023, respectively. All cash flows related to the Company's interest rate swap instruments are denominated in U.S. Dollars. For further information, refer to Note 6 and Note 12 of the Consolidated Financial Statements.
Expected cash outflows (notional amounts) over the next five years and thereafter related to debt instruments are as follows.
Long-Term Debt Instruments:
Interest rate 2.348%(2) $ — $ — $ — $ 75.0 $ — $ — $ 75.0
(1) Amount does not include the recorded fair value of the swap instruments.
(2) The Company's revolving credit facility and Term Loans have a variable interest rate, but due to the interest rate swaps, the rate on $150.0 million, $75.0 million, $575.0 million and $150.0 million will be fixed at 1.91%, 2.348%, 1.65% and 3.95%, respectively.
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Item 8 Financial Statements and Supplementary Data
MillerKnoll, Inc.
Consolidated Statements of Comprehensive Income
Year Ended
Operating expenses:
Restructuring expenses 30.8 34.4 —
Interest and other investment (income) expense (6.1) (2.8) (1.6)
Other (income) expense, net (2.6) (0.3) 12.2
Earnings (loss) before income taxes and equity income 99.7 51.4 (8.6)
Equity (loss) earnings from nonconsolidated affiliate, net of tax (0.4) (0.8) —
Net earnings attributable to redeemable noncontrolling interests 2.3 4.0 7.4
Net earnings (loss) attributable to MillerKnoll, Inc. $ 82.3 $ 42.1 $ (27.1)
Earnings (loss) per share - basic $ 1.12 $ 0.56 $ (0.37)
Earnings (loss) per share - diluted 1.11 0.55 (0.37)
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments 8.3 (20.1) (90.0)
Pension and post-retirement liability adjustments (9.5) 13.1 13.5
Unrealized gains on interest rate swap agreement 3.6 19.0 34.5
Other comprehensive income (loss), net of tax 2.4 12.0 (42.0)
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MillerKnoll, Inc.
Consolidated Balance Sheets
(In millions, except share and per share data) June 1, 2024 June 3, 2023
ASSETS
Current Assets:
Cash and cash equivalents $ 230.4 $ 223.5
Accounts receivable, net of allowances of $7.4 and $6.4 308.3 334.1
Unbilled accounts receivable 22.2 29.4
Assets held for sale 3.5 —
Other current assets 10.1 9.1
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS & STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings and current portion of long-term debt 43.5 33.4
Accrued compensation and benefits 104.5 61.7
Short-term lease liability 67.2 77.1
Pension and post-retirement benefits 10.0 7.5
Redeemable noncontrolling interests 73.9 107.6
Stockholders' Equity:
Preferred stock, no par value (10,000,000 shares authorized, none issued) — —
Accumulated other comprehensive loss (92.7) (95.1)
48
MillerKnoll, Inc.
Consolidated Statements of Stockholders' Equity
(In millions, except share and per share data) Shares Amount
Net loss — — — (27.1) — — (27.1)
Other comprehensive loss, net of tax — — — — (42.0) — (42.0)
Stock-based compensation expense — — 31.4 — — — 31.4
Restricted stock issuance 611,452 0.1 (0.1) — — — —