MillerKnoll, Inc. — Q2 FY2022 Form 10-Q
Reporting period: Three and six months ended November 27, 2021. The company, formerly Herman Miller, acquired Knoll on July 19, 2021 and included Knoll’s results from that date; comparisons with the prior year therefore do not include Knoll. The company name and ticker changed to MillerKnoll and MLKN effective November 1, 2021.
Financial results
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $1,026.3 million, up 63.9% | $1,816.0 million, up 44.9% |
| Organic sales growth | 11.1% | 5.8% |
| Gross margin | 34.2%, versus 39.0% | 34.6%, versus 39.4% |
| Operating earnings (loss) | $3.8 million, versus $71.0 million | $(49.0) million, versus $166.4 million |
| Net earnings (loss) attributable to MillerKnoll | $(3.4) million, versus $51.3 million | $(64.9) million, versus $124.2 million |
| Diluted EPS | $(0.05), versus $0.87 | $(0.92), versus $2.10 |
| Adjusted diluted EPS (non-GAAP) | $0.51, versus $0.89 | $1.00, versus $2.13 |
| Orders | $1,157.9 million, up 83.9%; organic orders up 26.4% | $2,074.4 million, up 75.0% |
- Margins and costs: Lower gross margin reflected commodity, freight and distribution costs, labor expense, Knoll purchase-accounting effects, and unfavorable mix. Management estimated these factors reduced Q2 gross margin by about 330 basis points for commodities, freight and distribution, 70 basis points for labor, and 50 basis points for acquired-intangible amortization.
- Cash flow: Six-month operating cash flow was $(57.6) million, compared with $214.6 million provided in the prior-year period. Investing cash flow was $(1,133.8) million, including $1,088.5 million net cash paid for acquisitions. Financing provided $1,035.5 million. Cash declined $169.1 million to $227.3 million.
- Debt and liquidity: Debt totaled $1,391.2 million before $21.2 million of unamortized discounts and issuance costs; balance-sheet current and long-term debt totaled $1,370.0 million. The company had $581.2 million of reported liquidity: $227.3 million cash, $7.4 million short-term investments and $346.5 million available on its $725 million revolving facility. Interest expense was $9.2 million for the quarter and $14.8 million for the six months.
- Acquisition and segments: Knoll consideration was preliminarily valued at $1,887.3 million. Knoll contributed $492.7 million in sales and a $73.3 million net loss from acquisition through November 27. Q2 segment operating results included a $20.6 million Knoll loss; Americas Contract earnings fell to $6.3 million, while International Contract earned $15.2 million and Global Retail $23.2 million.
Changes, outlook and risks
- Reported sales growth was substantially acquisition-driven: Knoll added approximately $330 million of Q2 sales and $483 million for the six-month period. Organic sales grew 11.1% in Q2, but six-month Americas Contract organic sales declined 4.5%; International Contract and Global Retail organic sales grew 12.2% and 23.7%, respectively.
- Knoll integration and acquisition-related costs totaled $95.8 million for the six months. The company said the multi-year integration program was expected to cost no more than approximately $100 million pre-tax. Costs included severance, impairment, debt extinguishment and other integration expenses. The filing also reports a $13.4 million debt-extinguishment loss.
- Management cited labor shortages, supply-chain and manufacturing-capacity constraints, higher steel and other material costs, and freight expense as pressures on shipments and margins. These constraints were expected to continue through the balance of fiscal 2022; management expected steel costs to remain an unfavorable margin factor for the year. Price increases and cost-reduction initiatives were expected to help offset pressures over time.
- Management described improving contract demand as customers developed return-to-office plans and continued strength in Global Retail, while noting uncertainty around the pandemic, future demand and supply constraints. No specific full-year revenue or earnings guidance is provided in the filing. Expected full-year capital purchases were $130 million to $140 million, versus $59.8 million in fiscal 2021.
- Other items to monitor include the preliminary Knoll purchase-price allocation, which remained subject to adjustment; the $15.5 million non-cash impairment charge; and the company’s stated risk that prolonged labor shortages could reduce production, limit fulfillment and increase costs. Management reported no material change in legal proceedings and no material expected impact from disclosed contingencies.
Important facts for investors to verify
- Whether supply-chain, labor and manufacturing-capacity constraints ease, and whether orders and the $967.3 million backlog convert to shipped sales.
- Whether price increases and cost actions offset input-cost and freight pressures sufficiently to stabilize gross margin.
- The final Knoll purchase accounting, integration costs, realized synergies and Knoll’s contribution to earnings and cash generation.
- Debt repayment, borrowing costs and liquidity needs, particularly given negative operating cash flow and acquisition-related leverage.
- Progress against the $130 million to $140 million fiscal 2022 capital-spending expectation and the stated integration-cost ceiling.