MillerKnoll (then Herman Miller, Inc.) — Form 10-Q Summary
Reporting period: Three months ended August 28, 2021, the first quarter of fiscal 2022. The company designs, manufactures and sells furnishings and related services across contract, retail, workplace and residential markets. It acquired Knoll on July 19, 2021; Knoll’s results are included from that date. A proposed corporate name change to MillerKnoll was awaiting shareholder approval.
Financial results
| Metric | Q1 FY2022 | Prior-year quarter |
|---|---|---|
| Net sales | $789.7 million | $626.8 million |
| Gross margin | $277.5 million; 35.1% | $250.0 million; 39.9% |
| Operating earnings (loss) | $(52.8) million | $95.4 million |
| Net earnings (loss) attributable to Herman Miller | $(61.5) million | $73.0 million |
| Diluted EPS | $(0.93) | $1.24 |
| Operating cash flow | $(51.7) million | $115.9 million |
- Sales rose 26.0%, substantially reflecting $156.4 million of Knoll sales after acquisition. Organic sales declined 0.4%; organic orders fell 34.5%. Reported orders increased 64.8% to $916.5 million, and backlog increased 109.0% to $835.9 million.
- Gross margin fell 4.8 percentage points. Management cited commodity, freight, distribution and labor cost pressures and $6.3 million of initial Knoll purchase-accounting effects, partly offset by favorable channel mix.
- Operating expenses rose 113.6% to $330.3 million, including acquisition transaction and integration costs and acquired intangible amortization. Adjusted diluted EPS, a non-GAAP measure, was $0.49 versus $1.24.
- Cash and cash equivalents were $235.1 million at quarter-end, down from $396.4 million at May 29, 2021. Total liquidity, including short-term investments and undrawn revolver availability, was $637.7 million.
- Debt was $1.343 billion, including $315 million drawn on the revolving facility and $1.025 billion of term loans. The $725 million revolver had $394.6 million available after letters of credit. The filing reports interest expense of $5.6 million.
Segments and material changes
- Americas Contract: Sales fell 12.1% to $325.3 million; operating earnings fell to $10.5 million from $57.9 million, amid lower volume and cost pressures.
- International Contract: Sales increased 5.3% to $99.0 million; operating earnings declined to $11.3 million from $16.2 million.
- Global Retail: Sales increased 30.7% to $212.6 million; operating earnings were $27.8 million versus $31.5 million, as costs and mix weighed on margins.
- Knoll: Contributed $156.4 million in sales and recorded a $53.6 million operating loss for the post-acquisition period, including integration expenses and acquired-intangible amortization.
- The company paid $1.089 billion, net of cash acquired, for the Knoll acquisition. The preliminary purchase-price allocation included $925.9 million of goodwill, which the company said is not expected to be tax deductible.
- Operating cash outflow and higher working capital contributed to the cash decline; investing outflow was $1.105 billion, primarily from the acquisition. Financing provided $1.002 billion, primarily through acquisition-related borrowings.
Outlook, commentary and risks
- Management expected fiscal 2022 capital purchases of $150–$160 million, compared with $59.8 million in fiscal 2021. It expected Knoll integration costs not to exceed approximately $100 million pre-tax; $55.6 million had been incurred through the quarter, with a substantial portion of the remaining recorded liability expected to be paid in fiscal 2022.
- Management said steel and other commodity prices, labor shortages, freight costs and supply-network constraints were pressuring sales and gross margins. Price increases and cost-reduction efforts were expected to help offset input-cost pressure over time; no specific earnings or revenue guidance was provided.
- COVID-19 continued to make demand and supply-chain conditions difficult to predict. Management described improving contract activity and sustained home-furnishings demand but noted uncertainty about the pandemic’s duration and its effects.
- The filing identifies qualified-labor shortages as a risk that could constrain production, customer fulfillment and earnings. Other cited risks include raw-material availability and pricing, customer spending, competition, foreign exchange, and Knoll integration and synergy realization.
- Other notable items: $13.4 million loss on early debt extinguishment; $26.7 million of acquisition transaction costs; and acquisition-related integration charges. The preliminary Knoll purchase accounting remains subject to change. The company reported effective disclosure controls, while Knoll’s financial-reporting controls were still being integrated.
Important facts for investors to verify
- Whether organic order trends, backlog conversion and Americas Contract demand improve, and how reported results compare with organic results after Knoll’s inclusion.
- Whether pricing and productivity actions offset labor, freight and commodity costs and support recovery in gross margin.
- Knoll integration spending, expected savings, final purchase accounting and the pace of debt reduction; the stated integration-cost ceiling is approximately $100 million.
- Liquidity and working-capital trends, including inventory growth and the impact of acquisition-related borrowing and variable interest rates.
- Management’s subsequent disclosures on COVID-19, labor and supplier constraints, and any changes to capital-spending expectations.