MILLERKNOLL, INC. 10-Q

Item 1: Financial Statements MillerKnoll, Inc. Condensed Consolidated Statements of Comprehensive Income (Loss) (Dollars in millions, except share data) Three Months Ended (Unaudited) September 3, 2022 August 28, 2021 Net sales $ 1,078.8 $ 789.7 Cost of sales 706.7 512.0 Gross margin 372.1 277.7 Operating expenses: Selling, general and administrative 296.9 306.8 Restructuring expense 0.5 — Design and research 23.9 23.5 Total operating expenses 321.3 330.3 Operating earnings (loss) 50.8 ( 52.6 ) Interest expense 16.7 5.6 Interest and other investment income 0.4 0.3 Other (income) expense, net 0.8 12.7 Earnings (loss) before income taxes and equity income 33.7 ( 70.6 ) Income tax expense (benefit) 6.3 ( 10.7 ) Equity income from nonconsolidated affiliates, net of tax — 0.1 Net earnings (loss) 27.4 ( 59.8 ) Net earnings attributable to redeemable noncontrolling interests 1.6 1.6 Net earnings (loss) attributable to MillerKnoll, Inc. $ 25.8 $ ( 61.4 ) Earnings (loss) per share — basic $ 0.34 $ ( 0.92 ) Earnings (loss) per share — diluted $ 0.34 $ ( 0.92 ) Other comprehensive income (loss), net of tax: Foreign currency translation adjustments $ ( 72.5 ) $ ( 16.0 ) Pension and post-retirement liability adjustments 0.4 2.3 Unrealized gain (loss) on interest rate swap agreement 14.3 ( 1.0 ) Other comprehensive (loss), net of tax $ ( 57.8 ) $ ( 14.7 ) Comprehensive (loss) ( 30.4 ) ( 74.5 ) Comprehensive income attributable to redeemable noncontrolling interests 1.7 2.1 Comprehensive (loss) income attributable to MillerKnoll, Inc. $ ( 32.1 ) $ ( 76.6 ) See accompanying notes to Condensed Consolidated Financial Statements. 3 MillerKnoll, Inc. Condensed Consolidated Balance Sheets (Dollars in millions, except share data) (Unaudited) September 3, 2022 May 28, 2022 ASSETS Current Assets: Cash and cash equivalents $ 215.8 $ 230.3 Short-term investments — — Accounts receivable, net of allowances of $ 7.5 and $ 9.7 338.5 348.9 Unbilled accounts receivable 33.8 32.0 Inventories, net 615.5 587.3 Prepaid expenses 118.5 112.1 Other current assets 9.1 7.3 Total current assets 1,331.2 1,317.9 Property and equipment, at cost 1,511.5 1,509.7 Less — accumulated depreciation ( 952.0 ) ( 928.2 ) Net property and equipment 559.5 581.5 Right of use assets 418.1 425.8 Goodwill 1,197.5 1,226.2 Indefinite-lived intangibles 491.3 501.0 Other amortizable intangibles, net of accumulated amortization of $ 138.0 and $ 134.7 342.8 362.4 Other noncurrent assets 107.0 99.2 Total Assets $ 4,447.4 $ 4,514.0 LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS & STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 303.2 $ 355.1 Short-term borrowings and current portion of long-term debt 28.7 29.3 Accrued compensation and benefits 93.8 128.6 Short-term lease liability 78.1 79.9 Accrued warranty 20.5 18.8 Customer deposits 116.4 125.3 Other accrued liabilities 132.3 140.4 Total current liabilities 773.0 877.4 Long-term debt 1,484.4 1,379.2 Pension and post-retirement benefits 21.7 25.0 Lease liabilities 391.7 398.2 Other liabilities 301.1 300.2 Total Liabilities 2,971.9 2,980.0 Redeemable noncontrolling interests 100.7 106.9 Stockholders' Equity: Preferred stock, no par value ( 10,000,000 shares authorized, none issued) — — Common stock, $ 0.20 par value ( 240,000,000 shares authorized, 75,556,031 and 75,824,241 shares issued and outstanding in fiscal 2023 and 2022, respectively) 15.1 15.2 Additional paid-in capital 819.3 825.7 Retained earnings 705.3 693.3 Accumulated other comprehensive loss ( 164.9 ) ( 107.1 ) Deferred compensation plan — — Total Stockholders' Equity 1,374.8 1,427.1 Total Liabilities, Redeemable Noncontrolling Interests, and Stockholders' Equity $ 4,447.4 $ 4,514.0 See accompanying notes to Condensed Consolidated Financial Statements. 4 MillerKnoll, Inc. Condensed Consolidated Statements of Cash Flows (Dollars in millions) Three Months Ended (Unaudited) September 3, 2022 August 28, 2021 Cash Flows from Operating Activities: Net earnings (loss) $ 27.4 $ ( 59.8 ) Adjustments to reconcile net earnings to net cash (used in) provided by operating activities: Depreciation and amortization 39.6 59.7 Stock-based compensation 5.4 15.1 Amortization of deferred financing costs 1.2 0.4 Deferred taxes 0.1 ( 8.2 ) Restructuring expense 0.5 — Loss on extinguishment of debt — 13.4 (Increase) decrease in current assets ( 47.2 ) ( 65.8 ) (Decrease) increase in current liabilities ( 91.2 ) ( 5.0 ) Other, net ( 0.6 ) ( 1.5 ) Net Cash Used in Operating Activities ( 64.8 ) ( 51.7 ) Cash Flows from Investing Activities: Notes receivables issued ( 4.5 ) — Capital expenditures ( 17.3 ) ( 18.6 ) Acquisitions, net of cash received — ( 1,088.5 ) Proceeds from loan on cash surrender value of life insurance 13.5 — Other, net ( 1.9 ) 2.4 Net Cash Used in Investing Activities ( 10.2 ) ( 1,104.7 ) Cash Flows from Financing Activities: Repayments of long-term debt ( 6.6 ) ( 50.0 ) Proceeds from issuance of debt, net of discounts — 1,007.0 Payments of deferred financing costs — ( 9.3 ) Proceeds from credit facility 401.4 366.6 Repayments of credit facility ( 290.5 ) ( 276.6 ) Payment of make whole premium on debt — ( 13.4 ) Dividends paid ( 14.2 ) ( 11.1 ) Common stock issued 1.7 2.2 Common stock repurchased and retired ( 14.3 ) ( 11.0 ) Other, net ( 0.5 ) ( 2.8 ) Net Cash Provided by Financing Activities 77.0 1,001.6 Effect of Exchange Rate Changes on Cash and Cash Equivalents ( 16.5 ) ( 6.5 ) Net Decrease in Cash and Cash Equivalents ( 14.5 ) ( 161.3 ) Cash and Cash Equivalents, Beginning of Period 230.3 396.4 Cash and Cash Equivalents, End of Period $ 215.8 $ 235.1 See accompanying notes to Condensed Consolidated Financial Statements. 5 MillerKnoll, Inc. Condensed Consolidated Statements of Stockholders' Equity Three Months Ended September 3, 2022 (Dollars in millions, except share data) Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Deferred Compensation Plan MillerKnoll, Inc. Stockholders' Equity (Unaudited) Shares Amount May 28, 2022 75,824,241 $ 15.2 $ 825.7 $ 693.3 $ ( 107.1 ) $ — $ 1,427.1 Net earnings — — — 25.8 — — 25.8 Other comprehensive income, net of tax — — — — ( 57.8 ) — ( 57.8 ) Stock-based compensation expense ( 13,474 ) — 5.4 — — — 5.4 Exercise of stock options 43,469 — 1.0 — — — 1.0 Restricted and performance stock units released 160,551 — 0.1 — — — 0.1 Employee stock purchase plan issuances 35,753 — 0.8 — — — 0.8 Repurchase and retirement of common stock ( 494,509 ) ( 0.1 ) ( 14.2 ) — — — ( 14.3 ) Dividends declared ($ 0.1875 per share) — — — ( 14.3 ) — — ( 14.3 ) Other — — 0.5 0.5 — — 1.0 September 3, 2022 75,556,031 $ 15.1 $ 819.3 $ 705.3 $ ( 164.9 ) $ — $ 1,374.8 Three Months Ended August 28, 2021 (Dollars in millions, except share data) Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Deferred Compensation Plan MillerKnoll, Inc. Stockholders' Equity (Unaudited) Shares Amount May 29, 2021 59,029,165 $ 11.8 $ 94.7 $ 819.3 $ ( 65.1 ) $ ( 0.2 ) $ 860.5 Net earnings — — — ( 61.3 ) — — ( 61.3 ) Other comprehensive income, net of tax — — — — ( 15.2 ) — ( 15.2 ) Stock-based compensation expense — — 15.1 — — — 15.1 Exercise of stock options 49,584 — 1.3 — — — 1.3 Restricted and performance stock units released 358,016 — — — — — — Employee stock purchase plan issuances 19,020 — 0.7 — — — 0.7 Repurchase and retirement of common stock ( 267,522 ) — ( 11.0 ) — — — ( 11.0 ) Shares issued for the acquisition of Knoll 15,843,921 3.2 685.1 — — — 688.3 Pre-combination expense from Knoll rollover 751,907 0.2 22.4 — — — 22.6 Dividends declared ($ 0.1875 per share) — — — ( 14.3 ) — — ( 14.3 ) August 28, 2021 75,784,091 $ 15.2 $ 808.3 $ 743.7 $ ( 80.3 ) $ ( 0.2 ) $ 1,486.7 See accompanying notes to Condensed Consolidated Financial Statements. 6 Notes to Condensed Consolidated Financial Statements (Dollars in millions, except share data) (unaudited) 1. Description of Business MillerKnoll, Inc. (the "Company") researches, designs, manufactures, sells, and distributes interior furnishings for use in various environments including office, healthcare, educational, and residential settings and provides related services that support companies all over the world. The Company's products are sold through independent contract office furniture dealers, retail studios, the Company’s eCommerce platforms, direct mail catalogs, as well as direct customer sales and independent retailers.. On July 19, 2021 the Company acquired Knoll, Inc. ("Knoll") (See Note 5. "Acquisitions"). Knoll is a leading global manufacturer of commercial and residential furniture, accessories, lighting and coverings. The Company has included the financial results of Knoll in the condensed consolidated financial statements from the date of acquisition. On October 11, 2021, the Company's shareholders approved an amendment to our Restated Articles of Incorporation to change our corporate name from Herman Miller, Inc. to MillerKnoll, Inc. On November 1, 2021, the change in corporate name and ticker symbol to MLKN became effective. MillerKnoll is a collective of dynamic brands that comes together to design the world we live in. A global leader in design, MillerKnoll includes Herman Miller® and Knoll®, as well as Colebrook Bosson Saunders®, DatesWeiser®, Design Within Reach®, Edelman® Leather, Fully®, Geiger®, HAY®, Holly Hunt®, KnollTextiles®, Maars® Living Walls, Maharam®, Muuto®, naughtone®, and Spinneybeck®|FilzFelt®. MillerKnoll represents over 100 years of design research and exploration in service of humanity. The Company is united by a belief in design as a tool to create positive impact and shape a more sustainable, caring, and beautiful future for all people and the planet. Basis of Presentation The Condensed Consolidated Financial Statements have been prepared by MillerKnoll, Inc. in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. Management believes the disclosures made in this document are adequate with respect to interim reporting requirements. Unless otherwise noted or indicated by the context, all references to "MillerKnoll," "we," "our," "Company" and similar references are to MillerKnoll, Inc., its predecessors, and controlled subsidiaries. The accompanying unaudited Condensed Consolidated Financial Statements, taken as a whole, contain all adjustments that are of a normal recurring nature necessary to present fairly the financial position of the Company as of September 3, 2022. Operating results for the three months ended September 3, 2022 are not necessarily indicative of the results that may be expected for the year ending June 3, 2023 ("fiscal 2023"). It is suggested that these Condensed Consolidated Financial Statements be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended May 28, 2022 ("fiscal 2022"). All intercompany transactions have been eliminated in the Condensed Consolidated Financial Statements. The financial statements of equity method investments are not consolidated. Segment Reorganization Effective as of May 29, 2022, the beginning of fiscal year 2023, the Company implemented an organizational change that resulted in a change in the reportable segments. The Company has recast historical results to reflect this change. See Note 15 "Operating Segments" for additional information. The Company's fiscal year is the 52 or 53 week period ending on the Saturday closest to May 31. The fiscal year ended May 28, 2022 ("fiscal 2022") was a 52 week period while the fiscal year ending June 3, 2023 ("fiscal 2023") will be a 53 week period. The first quarter of fiscal 2022 contained 13 weeks and the first quarter of fiscal 2023 contained 14 weeks. Change in Accounting Principle In the fourth quarter of fiscal 2022, we elected to change our method of accounting for the cost of certain inventories within our Americas segment from the last-in, first-out method (“LIFO”) to first-in, first-out method (“FIFO”). With this change there are 7 no longer any inventories accounted for under the LIFO method. We have retrospectively adjusted the Consolidated Financial Statements for the prior period presented to reflect this change. 2. Recently Issued Accounting Standards The Company evaluates all Accounting Standards Updates ("ASUs") issued by the Financial Accounting Standards Board ("FASB") for consideration of their applicability to our consolidated financial statements. We have assessed all ASUs issued but not yet adopted and concluded that those not disclosed are not relevant to the Company or are not expected to have a material impact. 3. Revenue from Contracts with Customers Disaggregated Revenue Revenue disaggregated by contract type is provided in the table below: Three Months Ended (In millions) September 3, 2022 August 28, 2021 Net Sales: Single performance obligation Product revenue $ 1,007.7 $ 736.3 Multiple performance obligations Product revenue 66.5 49.6 Service revenue 1.2 1.9 Other 3.4 1.9 Total $ 1,078.8 $ 789.7 The Company internally reports and evaluates products based on the categories Workplace, Performance Seating, Lifestyle and Other. A description of these categories is included below. The Workplace category includes products centered on creating highly functional and productive settings for both groups and individuals. This category focuses on the development of products, beyond seating, that define boundaries, support work and enable productivity. The Performance Seating category includes products centered on seating ergonomics, productivity and function across an evolving and diverse range of settings. This category focuses on the development of ergonomic seating solutions for specific use cases requiring more than basic utility. The Lifestyle category includes products focused on bringing spaces to life through beautiful yet functional products. This category focuses on the development of products that support a way of living, in thoughtful yet elevated ways. The products in this category help create emotive and visually appealing spaces via a portfolio that offers diversity in aesthetics, price and performance. 8 Revenue disaggregated by product type and reportable segment is provided in the table below: Three Months Ended (In millions) September 3, 2022 August 28, 2021 Americas Contract: Workplace $ 338.7 $ 233.7 Performance Seating 118.9 92.6 Lifestyle 71.1 44.8 Other 8.7 10.2 Total Americas Contract $ 537.4 $ 381.3 International Contract & Specialty: Workplace $ 44.4 $ 28.2 Performance Seating 68.9 49.7 Lifestyle 107.0 54.0 Other 52.2 35.2 Total International Contract & Specialty $ 272.5 $ 167.1 Global Retail: Workplace $ 27.5 $ 19.0 Performance Seating 51.2 63.4 Lifestyle 189.8 158.5 Other 0.4 0.4 Total Global Retail $ 268.9 $ 241.3 Total $ 1,078.8 $ 789.7 (1) "Other" primarily consists of textiles, uncategorized product sales, and service sales. Refer to Note 15 of the Condensed Consolidated Financial Statements for further information related to our reportable segments. Contract Balances Customers may make payments before the satisfaction of the Company's performance obligation and recognition of revenue. These payments represent contract liabilities and are included within the caption “Customer deposits” in the Condensed Consolidated Balance Sheets. During the three months ended September 3, 2022, and August 28, 2021 the Company recognized Net sales of $ 79.1 million and $ 41.1 million, respectively, related to customer deposits that were included in the balance sheet as of August 28, 2021 and May 28, 2022 respectively. 4. Acquisitions Knoll, Inc. On July 19, 2021, the Company completed its previously announced acquisition of Knoll, Inc. (“Knoll"), a leader in the design, manufacture, marketing and sale of high-end furniture products and accessories for workplace and residential markets. The Company has included the financial results of Knoll in the condensed consolidated financial statements from the date of acquisition. The transaction costs associated with the acquisition, which included financial advisory, legal, proxy filing, regulatory and financing fees, were approximately $ 30.0 million for the twelve months ended May 28, 2022 and were recorded in general and administrative expenses. Of the total transaction costs, $ 26.7 million were recorded in the three months ended August 28, 2021. Under the terms of the Agreement and Plan of Merger, each issued and outstanding share of Knoll common stock (excluding shares exercising dissenters rights, shares owned by Knoll as treasury stock, shares owned by the deal parties or their subsidiaries, or shares subject to Knoll restricted stock awards) was converted into a right to receive 0.32 shares of Herman 9 Miller, Inc. (now MillerKnoll, Inc.) common stock and $ 11.00 in cash, without interest. The acquisition date fair value of the consideration transferred for Knoll was $ 1,887.3 million, which consisted of the following (in millions, except share amounts): Knoll Shares Herman Miller, Inc (now MillerKnoll, Inc.) Shares Exchanged Fair Value Cash Consideration: Shares of Knoll Common Stock issued and outstanding at July 19, 2021 49,444,825 $ 543.9 Knoll equivalent shares for outstanding option awards, outstanding awards of restricted common stock held by non-employee directors and outstanding awards of performance units held by individuals who are former employees of Knoll and remain eligible to vest at July 19, 2021 184,857 1.4 Total number of Knoll shares for cash consideration 49,629,682 Shares of Knoll Preferred Stock issued and outstanding at July 19, 2021 169,165 254.4 Consideration for payment to settle Knoll's outstanding debt 376.9 Share Consideration: Shares of Knoll Common Stock issued and outstanding at July 19, 2021 49,444,825 Knoll equivalent shares for outstanding awards of restricted common stock held by non-employee directors and outstanding awards of performance units held by individuals who are former employees of Knoll and remain eligible to vest at July 19, 2021 74,857 Total number of Knoll shares for share consideration 49,519,682 15,843,921 688.3 Replacement Share-Based Awards: Outstanding awards of Knoll Restricted Stock and Performance units relating to Knoll Common Stock at July 19, 2021 22.4 Total acquisition date fair value of consideration transferred $ 1,887.3 The aggregate cash paid in connection with the Knoll acquisition was $ 1,176.6 million. MillerKnoll funded the acquisition through cash on-hand and debt proceeds, as described in "Note 14. Short-Term Borrowings and Long-Term Debt." Outstanding unvested restricted stock awards, performance stock awards, performance stock units and restricted stock units with a fair value of $ 53.4 million automatically converted into Company awards. Of the total fair value, $ 22.4 million was allocated to purchase consideration and $ 31.0 million was allocated to future services and will be expensed over the remaining service periods on a straight-line basis. Per the terms of the converted awards any qualifying termination within the twelve months subsequent to the acquisition resulted in accelerated vesting and related recognition of expense. The transaction was accounted for as a business combination which requires that assets and liabilities assumed be recognized at their fair value as of the acquisition date. The following table summarizes the fair value of assets acquired and liabilities assumed as of the date of acquisition: 10 (In millions) Fair Value Cash $ 88.0 Accounts receivable 82.3 Inventories 219.9 Other current assets 29.2 Property and equipment 296.5 Right-of-use assets 202.7 Intangible assets 756.6 Goodwill 903.5 Other noncurrent assets 25.1 Total assets acquired 2,603.8 Accounts payable 144.0 Other current liabilities 153.1 Lease liabilities 177.8 Other liabilities 241.6 Total liabilities assumed 716.5 Net Assets Acquired $ 1,887.3 The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. Goodwill is attributed to the assembled workforce of Knoll and anticipated operational synergies. Goodwill related to the acquisition was allocated to each of the reporting segments with a total value as of the opening balance sheet date of $ 903.5 million. Goodwill arising from the acquisition is not deductible for tax reporting purposes. The following table summarizes the acquired identified intangible assets, valuation method employed, useful lives and fair value, as determined by the Company as of the acquisition date: (In millions) Valuation Method Useful Life (years) Fair Value Backlog Multi-Period Excess Earnings Less than 1 Year $ 27.6 Trade name - indefinite lived Relief from Royalty Indefinite 418.0 Trade name - amortizing Relief from Royalty 5 - 10 Years 14.0 Designs Relief from Royalty 9 - 15 years 40.0 Customer Relationships Multi-Period Excess Earnings 2 - 15 years 257.0 Total $ 756.6 Unaudited Pro Forma Results of Operations The results of Knoll's operations have been included in the Consolidated Financial Statements beginning on July 19, 2021. The following table provides pro forma results of operations for the three months ended August 28, 2021, as if Knoll had been acquired as of May 31, 2020. The pro forma results include certain purchase accounting adjustments such as the estimated change in depreciation and amortization expense on the acquired tangible and intangible assets. The pro forma results also include the impact of incremental interest expense incurred to finance the merger. Transaction related costs, including debt extinguishment costs related to the transaction, have been eliminated from the pro forma amounts presented in both periods. Pro forma results do not include any anticipated cost savings from the integration of this acquisition. Accordingly, such amounts are not necessarily indicative of the results that would have occurred if the acquisition had occurred on the date indicated or that may result in the future. Three Months Ended (In millions) August 28, 2021 Net sales $ 943.9 Net (loss) attributable to MillerKnoll, Inc. $ ( 24.3 ) 5. Inventories, net 11 (In millions) September 3, 2022 May 28, 2022 Finished goods and work in process $ 451.0 $ 441.6 Raw materials 164.5 145.7 Total $ 615.5 $ 587.3 Inventories are primarily valued using the first-in first-out method. 6. Goodwill and Indefinite-Lived Intangibles Goodwill and other indefinite-lived intangible assets included in the Condensed Consolidated Balance Sheets consisted of the following as of September 3, 2022 and May 28, 2022: (In millions) Americas Contract International Contract & Specialty Global Retail Total May 28, 2022 Goodwill $ 530.1 $ 340.9 $ 480.6 1,351.6 Foreign currency translation adjustments ( 9.7 ) ( 8.9 ) ( 10.0 ) ( 28.6 ) Accumulated impairment losses — ( 36.7 ) ( 88.8 ) ( 125.5 ) September 3, 2022 $ 520.4 $ 295.3 $ 381.8 $ 1,197.5 Other indefinite-lived assets included in the Consolidated Balance Sheets consist of the following: (In millions) Indefinite-lived Intangible Assets May 28, 2022 $ 501.0 Foreign currency translation adjustments ( 9.7 ) September 3, 2022 $ 491.3 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 were reviewed for impairment using a qualitative assessment as of March 31, 2022, our annual testing date. In performing the qualitative impairment test for fiscal year 2022, the Company determined that the fair value of its reporting units exceeded the carrying amount and, as such, these reporting units were not impaired. In connection with the segment reorganization, certain of the Company’s reporting units have changed in composition, and goodwill was reallocated between such reporting units using a relative fair value approach. Accordingly, the Company performed interim goodwill impairment tests in the first quarter of 2023 for each reporting unit. Based on the results of the tests performed, the Company determined that the fair value of each reporting unit, both before and after the reorganization, exceeded its respective carrying amount. Intangible assets with indefinite useful lives are not subject to amortization and are evaluated annually for impairment, or more frequently when events or changes in circumstances indicate that the fair value of an intangible asset may not be recoverable. 7. Employee Benefit Plans The following table summarizes the components of net periodic benefit cost for the Company's defined benefit pension plans: 12 Pension Benefits Three Months Ended September 3, 2022 Three Months Ended August 28, 2021 (In millions) Domestic International Domestic International Service cost $ — $ — $ 0.1 $ — Interest cost 1.5 0.8 0.5 0.8 Expected return on plan assets (1) ( 2.0 ) ( 1.2 ) ( 1.0 ) ( 1.8 ) Net amortization loss — 0.6 — 1.7 Net periodic benefit cost $ ( 0.5 ) $ 0.2 $ ( 0.4 ) $ 0.7 (1) The weighted-average expected long-term rate of return on plan assets is 4.99 %. 8. Earnings Per Share The following table reconciles the numerators and denominators used in the calculations of basic and diluted earnings per share ("EPS") for the three months ended: Three Months Ended September 3, 2022 August 28, 2021 Numerators : Numerator for both basic and diluted EPS, Net earnings (loss) attributable to MillerKnoll, Inc. - in millions $ 25.8 $ ( 61.4 ) Denominators : Denominator for basic EPS, weighted-average common shares outstanding 75,482,572 66,302,214 Potentially dilutive shares resulting from stock plans 784,394 — Denominator for diluted EPS 76,266,966 66,302,214 Antidilutive equity awards not included in weighted-average common shares - diluted — 1,328,275 9. Stock-Based Compensation The following table summarizes the stock-based compensation expense and related income tax effect for the three months ended: Three Months Ended (In millions) September 3, 2022 August 28, 2021 Stock-based compensation expense $ 5.4 $ 15.1 Related income tax effect $ 1.3 $ 3.7 The decrease in stock-based compensation expense was driven in part by the prior year's acceleration of stock-based compensation award expense related to the workforce reductions subsequent to the Knoll integration. Certain Company equity-based compensation awards contain provisions that allow for continued vesting into retirement. Stock-based awards are considered fully vested for expense attribution purposes when the employee's retention of the award is no longer contingent on providing subsequent service. 10. Income Taxes The Company's process for determining the provision for income taxes for the three months ended September 3, 2022 involved using an estimated annual effective tax rate which was based on expected annual income and statutory tax rates across the various jurisdictions in which it operates. The effective tax rates were 18.8 % and 15.3 %, respectively, for the three month periods ended September 3, 2022 and August 28, 2021. The year over year change in the effective tax rate for the three months ended September 3, 2022 resulted from the current year quarter reporting pre-tax book income with favorable foreign tax credit impacts in the United States and the same quarter of the prior year reporting pre-tax book loss with non-deductible discrete 13 compensation and acquisition costs in connection with the Knoll acquisition. For the three months ended September 3, 2022, the effective tax rate is lower than the United States federal statutory rate due to the favorable impact of increased foreign tax credits in the United States resulting from the recapture of prior year overall domestic loss. For the three months ended August 28, 2021, the effective tax rate is lower than the United States federal statutory rate due to the impact of the Knoll acquisition related costs creating a pre-tax loss for the quarter coupled with non-deductible discrete compensation and acquisition costs in the quarter. The Company recognizes interest and penalties related to uncertain tax benefits through income tax expense in its Condensed Consolidated Statements of Comprehensive Income. Interest and penalties recognized in the Company's Condensed Consolidated Statements of Comprehensive Income were negligible for the three months ended September 3, 2022 and August 28, 2021. The Company's recorded liability for potential interest and penalties related to uncertain tax benefits was: (In millions) September 3, 2022 May 28, 2022 Liability for interest and penalties $ 1.0 $ 0.9 Liability for uncertain tax positions, current $ 2.2 $ 2.3 The Company is subject to periodic audits by domestic and foreign tax authorities. Currently, the Company is undergoing routine periodic audits in both domestic and foreign tax jurisdictions. It is reasonably possible that the amounts of unrecognized tax benefits could change in the next twelve months because of the audits. Tax payments related to these audits, if any, are not expected to be material to the Company's Condensed Consolidated Statements of Comprehensive Income. For the majority of tax jurisdictions, the Company is no longer subject to state, local, or non-United States income tax examinations by tax authorities for fiscal years before 2019. 11. Fair Value Measurements The Company's financial instruments consist of cash equivalents, marketable securities, accounts and notes receivable, a deferred compensation plan, accounts payable, debt, interest rate swaps, foreign currency exchange contracts, redeemable noncontrolling interests, indefinite-lived intangible assets and right-of-use assets. The Company's financial instruments, other than long-term debt, are recorded at fair value. The carrying value and fair value of the Company's long-term debt, including current maturities, is as follows for the periods indicated: (In millions) September 3, 2022 May 28, 2022 Carrying value $ 1,531.7 $ 1,427.9 Fair value $ 1,357.9 $ 1,364.7 The following describes the methods the Company uses to estimate the fair value of financial assets and liabilities recorded in net earnings, which have not significantly changed in the current period: Cash and cash equivalents — The Company invests excess cash in short term investments in the form of money market funds, which are valued using net asset value ("NAV"). Deferred compensation plan — The Company's deferred compensation plan primarily includes various domestic and international mutual funds that are recorded at fair value using quoted prices for similar securities. Foreign currency exchange contracts — The Company's foreign currency exchange contracts are valued using an approach based on foreign currency exchange rates obtained from active markets. The estimated fair value of forward currency exchange contracts is based on month-end spot rates as adjusted by market-based current activity. These forward contracts are not designated as hedging instruments. The following table sets forth financial assets and liabilities measured at fair value through net income and the respective pricing levels to which the fair value measurements are classified within the fair value hierarchy as of September 3, 2022 and May 28, 2022. 14 (In millions) September 3, 2022 May 28, 2022 Financial Assets NAV Quoted Prices with Other Observable Inputs (Level 2) NAV Quoted Prices with Other Observable Inputs (Level 2) Cash equivalents: Money market funds $ 18.5 $ — $ 31.8 $ — Foreign currency forward contracts — 1.2 — 0.4 Deferred compensation plan — 15.6 — 15.0 Total $ 18.5 $ 16.8 $ 31.8 $ 15.4 Financial Liabilities Foreign currency forward contracts — 5.1 — 1.0 Total $ — $ 5.1 $ — $ 1.0 The following describes the methods the Company uses to estimate the fair value of financial assets and liabilities recorded in other comprehensive income, which have not significantly changed in the current period: Interest rate swap agreements — The value of the Company's interest rate swap agreements are determined using a market approach based on rates obtained from active markets. The interest rate swap agreements are designated as cash flow hedging instruments. The following table sets forth financial assets and liabilities measured at fair value through other comprehensive income and the respective pricing levels to which the fair value measurements are classified within the fair value hierarchy as of September 3, 2022 and May 28, 2022. (In millions) September 3, 2022 May 28, 2022 Financial Assets Balance Sheet Location Quoted Prices with Other Observable Inputs (Level 2) Quoted Prices with Other Observable Inputs (Level 2) Interest rate swap agreement Other noncurrent assets 50.6 31.9 Total $ 50.6 $ 31.9 Financial Liabilities Interest rate swap agreement Other liabilities — — Total $ — $ — Derivative Instruments and Hedging Activities Foreign Currency Forward Contracts The Company transacts business in various foreign currencies and has established a program that primarily utilizes foreign currency forward contracts to reduce the risks associated with the effects of certain foreign currency exposures. Under this program, the Company's strategy is to have increases or decreases in our foreign currency exposures offset by gains or losses on the foreign currency forward contracts to mitigate the risks and volatility associated with foreign currency transaction gains or losses. Foreign currency exposures typically arise from net liability or asset exposures in non-functional currencies on the balance sheets of our foreign subsidiaries. Foreign currency forward contracts generally settle within 30 days and are not used for trading purposes. These forward contracts are not designated as hedging instruments. Accordingly, we record the fair value of these contracts as of the end of the reporting period in the Consolidated Balance Sheets with changes in fair value recorded within the Consolidated Statements of Comprehensive Income. The balance sheet classification for the fair values of these forward contracts is to "Other current assets" for unrealized gains and to "Other accrued liabilities" for unrealized losses. The Consolidated Statements of Comprehensive Income classification for the fair values of these forward contracts is to "Other (income) expense, net", for both realized and unrealized gains and losses. Interest Rate Swaps 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 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 15 swap agreements is used to measure interest to be paid or received. The differential paid or received on the interest rate swap agreements is recognized as an adjustment to interest expense. The interest rate swaps were designated as cash flow hedges at inception and the facts and circumstances of the hedged relationships remain consistent with the initial quantitative effectiveness assessment in that the hedged instruments remain an effective accounting hedge as of September 3, 2022. Since a designated derivative meets hedge accounting criteria, the fair value of the hedge is recorded in the Consolidated Statements of Stockholders’ Equity as a component of "Accumulated other comprehensive loss, net of tax." The ineffective portion of the change in fair value of the derivatives is immediately recognized in earnings. The interest rate swap agreements are assessed for hedge effectiveness on a quarterly basis. (In millions) Notional Amount Forward Start Date Termination Date Effective Fixed Interest Rate September 2016 Interest Rate Swap $ 150.0 January 3, 2018 January 3, 2028 1.949 % June 2017 Interest Rate Swap $ 75.0 January 3, 2018 January 3, 2028 2.387 % January 2022 Interest Rate Swap $ 575.0 January 31, 2022 January 29, 2027 1.689 % The swaps above effectively converted indebtedness anticipated to be borrowed on the Company's revolving line of credit up to the notional amounts from a LIBOR-based floating interest rate plus applicable margin to an effective fixed rate plus applicable margin under the agreements as of the forward start date. The following table summarizes the effects of the interest rate swap agreements for the three months ended: Three Months Ended (In millions) September 3, 2022 August 28, 2021 Gain recognized in Other comprehensive loss (effective portion) $ 14.3 $ ( 1.0 ) (Loss) reclassified from Accumulated other comprehensive loss into earnings $ ( 0.4 ) $ ( 0.8 ) There were no gains or losses recognized in earnings for hedge ineffectiveness for the three month periods ended September 3, 2022 and August 28, 2021. The amount of loss expected to be reclassified from Accumulated other comprehensive loss into earnings during the next twelve months is $ 15.0 million, and net of tax is $ 11.2 million. Redeemable Noncontrolling Interests Changes in the Company's redeemable noncontrolling interest in HAY for the three months ended September 3, 2022 and August 28, 2021 are as follows: (In millions) September 3, 2022 August 28, 2021 Beginning Balance $ 106.9 $ 77.0 Net income attributable to redeemable noncontrolling interests 1.6 1.6 Distributions to redeemable noncontrolling interests — ( 3.9 ) Cumulative translation adjustments attributable to redeemable noncontrolling interests 0.1 0.5 Foreign currency translation adjustments ( 7.9 ) ( 2.6 ) Ending Balance $ 100.7 $ 72.6 12. Commitments and Contingencies Product Warranties The Company provides coverage to the end-user for parts and labor on products sold under its warranty policy and for other product-related matters. The specific terms, conditions and length of those warranties vary depending upon the product sold. The Company does not sell or otherwise issue warranties or warranty extensions as stand-alone products. Reserves have been established for various costs associated with the Company's warranty programs. General warranty reserves are based on historical claims experience and other currently available information and are periodically adjusted for business levels and other factors. Specific reserves are established once an issue is identified with the amounts for such reserves based on the estimated cost of correction. The Company provides an assurance-type warranty that ensures that products will function as intended. As such, the Company's estimated warranty obligation is accounted for as a liability and is recorded within current and long-term liabilities within the Condensed Consolidated Balance Sheets. 16 Changes in the warranty reserve for the stated periods were as follows: Three Months Ended (In millions) September 3, 2022 August 28, 2021 Accrual Balance — beginning $ 73.2 $ 60.1 Accrual for warranty matters 4.3 5.4 Settlements and adjustments ( 5.2 ) ( 5.8 ) Acquired through business acquisition — 15.1 Measurement period adjustments to the reserve made subsequent to the period ended August 28, 2021 — ( 5.0 ) Accrual Balance — ending $ 72.3 $ 69.8 Guarantees The Company is periodically required to provide performance bonds to do business with certain customers. These arrangements are common in the industry and generally have terms ranging between one year and three years . The bonds are required to provide assurance to customers that the products and services they have purchased will be installed and/or provided properly and without damage to their facilities. The bonds are provided by various bonding agencies. However, the Company is ultimately liable for claims that may occur against them. As of September 3, 2022, the Company had a maximum financial exposure related to performance bonds totaling approximately $ 7.0 million. The Company has no history of claims, nor is it aware of circumstances that would require it to pay, under any of these arrangements. The Company also believes that the resolution of any claims that might arise in the future, either individually or in the aggregate, would not materially affect the Company's Consolidated Financial Statements. Accordingly, no liability has been recorded in respect to these bonds as of either September 3, 2022 or May 28, 2022. The Company has entered into standby letter of credit arrangements for purposes of protecting various insurance companies and lessors against default on insurance premium and lease payments. As of September 3, 2022, the Company had a maximum financial exposure from these standby letters of credit totaling approximately $ 14.5 million, all of which is considered usage against the Company's revolving line of credit. The Company has no history of claims, nor is it aware of circumstances that would require it to perform, under any of these arrangements and believes that the resolution of any claims that might arise in the future, either individually or in the aggregate, would not materially affect the Company's Consolidated Financial Statements. Accordingly, no liability has been recorded in respect to these arrangements as of September 3, 2022 or May 28, 2022. Contingencies The Company is also 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 have a material adverse effect, if any, on the Company's Consolidated Financial Statements. 13. Short-Term Borrowings and Long-Term Debt Short-term borrowings and long-term debt as of September 3, 2022 and May 28, 2022 consisted of the following: (In millions) September 3, 2022 May 28, 2022 Syndicated revolving line of credit, due July 2026 $ 523.9 $ 413.0 Term Loan A, 4.1250 %, due July 2026 385.0 390.0 Term Loan B, 4.3750 %, due July 2028 620.3 621.8 Supplier financing program 2.5 3.1 Total debt $ 1,531.7 $ 1,427.9 Less: Unamortized discount and issuance costs ( 18.6 ) ( 19.4 ) Less: Current debt ( 28.7 ) ( 29.3 ) Long-term debt $ 1,484.4 $ 1,379.2 In connection with the acquisition of Knoll, in July, 2021, the Company entered into a credit agreement that provided for a syndicated revolving line of credit and two term loans. The revolving line of credit provides the Company with up to $ 725 million in revolving variable interest borrowing capacity that matures in July 2026, replacing the previous $ 500 million 17 syndicated revolving line of credit. The term loans consist of a five-year senior secured term loan "A" facility with an aggregate principal amount of $ 400 million and a seven-year senior secured term loan "B" facility with an aggregate principal amount of $ 625 million, the proceeds of which were used to finance a portion of the cash consideration for the acquisition of Knoll, for the repayment of certain debt of Knoll and to pay fees, costs and expenses related thereto. Both term loans have a LIBOR-based floating interest rate plus applicable margin. The credit agreement provides for the transition from LIBOR to SOFR, the recommended risk-free reference rate of the Federal Reserve Board and Alternative Reference Rates Committee, as of the LIBOR Transition Date, as defined within the credit agreement. The credit agreement includes accommodations regarding the transition to SOFR. In the three months ended August 28, 2021, the Company repaid $ 64 million of private placement notes due May 20, 2030 and a loss on extinguishment of debt of approximately $ 13.4 million was recognized as part of the repayment of the private placement notes, which represented the premium on early redemption. The Company made principal payments on term loan "A" and "B" during the three months ended September 3, 2022 in the amount of $ 5.0 million and $ 1.6 million, respectively. Available borrowings under the syndicated revolving line of credit were as follows for the periods indicated: (In millions) September 3, 2022 May 28, 2022 Syndicated revolving line of credit borrowing capacity $ 725.0 $ 725.0 Less: Borrowings under the syndicated revolving line of credit 523.9 413.0 Less: Outstanding letters of credit 14.5 15.4 Available borrowings under the syndicated revolving line of credit $ 186.6 $ 296.6 Supplier Financing Program The Company has an agreement with a third-party financial institution that allows certain participating suppliers the ability to finance payment obligations of the Company. Under this program, participating suppliers may finance payment obligations of the Company, prior to their scheduled due dates, at a discounted price to the third-party financial institution. The Company has lengthened the payment terms for certain suppliers that have chosen to participate in the program. As a result, certain amounts due to suppliers have payment terms that are longer than standard industry practice and as such, these amounts have been excluded from “Accounts payable” in the Condensed Consolidated Balance Sheets as the amounts have been accounted for by the Company as current debt, within “Short-term borrowings and current portion of long-term debt”. 14. Accumulated Other Comprehensive Loss The following table provides an analysis of the changes in accumulated other comprehensive loss for the three months ended September 3, 2022 and August 28, 2021: 18 (In millions) Cumulative Translation Adjustments Pension and Other Post-retirement Benefit Plans Interest Rate Swap Agreement Accumulated Other Comprehensive Loss Balance at May 28, 2022 $ ( 93.9 ) $ ( 36.9 ) $ 23.7 $ ( 107.1 ) Other comprehensive (loss) income, net of tax before reclassifications ( 72.5 ) — 14.7 ( 57.8 ) Reclassification from accumulated other comprehensive loss - Other, net — 0.5 ( 0.4 ) 0.1 Tax benefit — ( 0.1 ) — ( 0.1 ) Net reclassifications — 0.4 ( 0.4 ) — Net current period other comprehensive (loss) income ( 72.5 ) 0.4 14.3 ( 57.8 ) Balance at September 3, 2022 $ ( 166.4 ) $ ( 36.5 ) $ 38.0 $ ( 164.9 ) Balance at May 29, 2021 $ ( 3.9 ) $ ( 50.4 ) $ ( 10.8 ) $ ( 65.1 ) Other comprehensive income (loss), net of tax before reclassifications ( 16.5 ) — ( 0.2 ) ( 16.7 ) Reclassification from accumulated other comprehensive loss - Other, net — 2.5 ( 0.8 ) 1.7 Tax benefit — ( 0.2 ) — ( 0.2 ) Net reclassifications — 2.3 ( 0.8 ) 1.5 Net current period other comprehensive income (loss) ( 16.5 ) 2.3 ( 1.0 ) ( 15.2 ) Balance at August 28, 2021 $ ( 20.4 ) $ ( 48.1 ) $ ( 11.8 ) $ ( 80.3 ) 15. Operating Segments Effective as of May 29, 2022, the beginning of fiscal year 2023, the Company implemented an organizational change that resulted in a change in the reportable segments. The Company has restated historical results to reflect this change. Below is a summary of the change in reportable segments. • The reportable segments now consist of three segments: Americas Contract ("Americas"), International Contract & Specialty ("International & Specialty"), and Global Retail ("Retail"). • The activities related to the manufacture and sale of furniture products direct to consumers and third-party retailers for the Knoll, Muuto and Fully brands that were previously reported within the Knoll segment have been moved to the Global Retail segment. • The activities related to the manufacture and sale of furniture products in the Americas for the Knoll, Muuto and Datesweiser brands that were previously reported within the Knoll segment have been moved to the Americas Contract segment. • The activities related to the manufacture and sale of furniture products in geographies other than the Americas for the Knoll and Muuto brands have been moved to the International Contract & Specialty segment. • The activities related to manufacture and sale of products for the Maharam brand have been moved from the Americas Contract segment to the International Contract & Specialty segment, along with the activities of Holly Hunt, Spinneybeck, Knoll Textiles, and Edelman, which were previously reported within the Knoll segment. The Americas Contract segment 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. The International Contract and Specialty segment includes the operations associated with the design, manufacture and sale of furniture products, indirectly or directly through an independent dealership network in Europe, the Middle East, Africa and Asia-Pacific as well as the global operations of the Specialty brands, which include Holly Hunt, Spinneybeck, Maharam, Edelman, and Knoll Textiles. The Global Retail segment 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. 19 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. Management regularly reviews corporate costs and believes disclosing such information provides more visibility and transparency regarding how the chief operating decision maker reviews results of the Company. The accounting policies of the operating segments are the same as those of the Company. The following is a summary of certain key financial measures for the respective periods indicated: Three Months Ended (In millions) September 3, 2022 August 28, 2021 Net Sales: Americas $ 537.4 $ 381.3 International & Specialty 272.5 167.1 Retail 268.9 241.3 Total $ 1,078.8 $ 789.7 Operating Earnings (Loss): Americas $ 20.4 $ ( 10.6 ) International & Specialty 27.9 6.6 Retail 17.8 26.4 Corporate ( 15.3 ) ( 75.0 ) Total $ 50.8 $ ( 52.6 ) Many of the Company's assets, including manufacturing, office and showroom facilities, support multiple segments. For that reason, it is impractical to disclose asset information on a segment basis. 16. Restructuring and Integration Expense As part of restructuring and integration activities the Company has incurred expenses that qualify as exit and disposal costs under U.S. GAAP. These include severance and employee benefit costs as well as other direct separation benefit costs. Severance and employee benefit costs primarily relate to cash severance, non-cash severance, including accelerated equity award compensation expense. The Company also incurs expenses that are an integral component of, and directly attribute to, our restructuring and integration activities, which do not qualify as exit and disposal costs under U.S. GAAP. These include integration implementation costs that relate primarily to professional fees and non-cash losses incurred on debt extinguishment. The expense associated with integration initiatives are included in Selling, general and administrative and the expense associated with restructuring activities are included in Restructuring expense in the Condensed Consolidated Statements of Comprehensive Income. Non-cash costs related to debt extinguishment in the financing of the transaction is recorded in Other expense (income), net in the Condensed Consolidated Statements of Comprehensive Income. Knoll Integration: Following the Knoll merger the Company announced a multi-year program (the "Knoll Integration") designed to reduce costs, integrate and optimize the combined organization. The Company currently expects that the Knoll Integration will result in pre-tax costs that are expected not to exceed approximately $ 100 million to $ 120 million, comprised of the following categories: • Severance and employee benefit costs associated with plans to integrate our operating structure, resulting in workforce reductions. These costs will primarily include: severance and employee benefits (cash severance, non-cash severance, including accelerated stock-compensation award expense and other termination benefits). • Exit and disposal activities include those incurred as a direct result of integration activities, primarily including contract and lease terminations and asset impairment charges. • Other integration costs include professional fees and other incremental third-party expenses, including a loss on extinguishment of debt associated with financing of the merger. For the three months ended September 3, 2022, we incurred $ 4.6 million of costs related to the Knoll Integration including: $ 1.2 million of severance and employee benefit costs, $ 1.4 million of lease termination fees, and $ 2.0 million of other integration costs. 20 The following table provides an analysis of the changes in liability balance for Knoll Integration costs that qualify as exit and disposal costs under U.S. GAAP (i.e., severance and employee benefit costs and exit and disposal activities) for the three months ended September 3, 2022: (In millions) Severance and Employee Benefit Exit and Disposal Activities Total May 29, 2022 $ 1.4 $ — $ 1.4 Integration Costs 1.2 1.4 2.6 Amounts Paid ( 1.5 ) ( 1.4 ) ( 2.9 ) Non-cash costs ( 0.2 ) — ( 0.2 ) September 3, 2022 $ 0.9 $ — $ 0.9 The Company's expects that a substantial portion of the liability for the Knoll Integration as of September 3, 2022 to be paid in fiscal year 2023. The following is a summary of integration expenses by segment for the periods indicated: Three Months Ended (In millions) September 3, 2022 August 28, 2021 Americas Contract $ 2.9 $ 1.0 International Contract & Specialty 0.5 — Retail 0.2 — Corporate 1.0 54.6 Total $ 4.6 $ 55.6 Restructuring Activities: During the first quarter of fiscal 2023, the Company recognized restructuring charges associated with involuntary workforce reductions within the Global Retail segment. As a result of this action the Company incurred severance and related charges of $ 0.5 million. The following table provides an analysis of the changes in the restructuring cost reserve for the three months ended September 3, 2022: (In millions) Severance and Employee-Related May 28, 2022 $ — Restructuring Costs 0.5 Amounts Paid — September 3, 2022 $ 0.5 The following is a summary of restructuring expenses by segment for the periods indicated: Three Months Ended (In millions) September 3, 2022 August 28, 2021 Americas Contract $ — $ — International Contract & Specialty — — Retail 0.5 — Total $ 0.5 $ — 21 17. Variable Interest Entities The Company entered into notes receivable with certain of its third-party owned dealers that are deemed to be variable interests in variable interest entities. The carrying value of these notes receivable was $ 5.8 million and $ 1.2 million as of September 3, 2022 and May 28, 2022 respectively. This carrying value of long-term notes receivable represents the Company’s maximum exposure to loss. The Company is not deemed to be the primary beneficiary for any of these variable interest entities as each dealer controls the activities that most significantly impact the entity’s economic performance, including sales, marketing, and operations. 22