Item 1. Financial Statements
Item 1: Financial Statements
MillerKnoll, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Dollars in millions, except share data) Three Months Ended Nine Months Ended
(Unaudited) March 4, 2023 February 26, 2022 March 4, 2023 February 26, 2022
Net sales $ 984.7 $ 1,029.5 $ 3,130.4 $ 2,845.5
Cost of sales 649.1 690.0 2,055.1 1,875.3
Gross margin 335.6 339.5 1,075.3 970.2
Operating expenses:
Selling, general and administrative 264.7 282.3 852.3 907.8
Impairment charges 21.5 — 21.5 —
Restructuring expense 4.6 — 19.8 —
Design and research 23.6 28.0 71.0 79.6
Total operating expenses 314.4 310.3 964.6 987.4
Operating earnings (loss) 21.2 29.2 110.7 ( 17.2 )
Interest expense 19.1 10.2 54.1 24.9
Interest and other investment income 0.9 0.6 2.0 1.2
Other expense (income), net 1.4 ( 0.2 ) 1.7 11.9
Earnings (loss) before income taxes and equity income 1.6 19.8 56.9 ( 52.8 )
Income tax expense (benefit) 0.5 3.6 11.1 ( 9.8 )
Equity income from nonconsolidated affiliates, net of tax — — 0.2 —
Net earnings (loss) 1.1 16.2 46.0 ( 43.0 )
Net earnings attributable to redeemable noncontrolling interests 0.7 1.8 3.8 5.7
Net earnings (loss) attributable to MillerKnoll, Inc. $ 0.4 $ 14.4 $ 42.2 $ ( 48.7 )
Earnings (loss) per share - basic $ 0.01 $ 0.19 $ 0.56 $ ( 0.66 )
Earnings (loss) per share - diluted $ 0.01 $ 0.19 $ 0.56 $ ( 0.66 )
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments $ ( 2.3 ) $ 5.4 $ ( 30.6 ) $ ( 48.7 )
Pension and post-retirement liability adjustments ( 0.4 ) 1.5 0.4 5.6
Unrealized gain on interest rate swap agreement 10.3 10.2 31.8 13.2
Other comprehensive income (loss), net of tax $ 7.6 $ 17.1 $ 1.6 $ ( 29.9 )
Comprehensive income (loss) 8.7 33.3 47.6 ( 72.9 )
Comprehensive income attributable to redeemable noncontrolling interests 0.7 1.8 3.8 3.7
Comprehensive income (loss) attributable to MillerKnoll, Inc. $ 8.0 $ 31.5 $ 43.8 $ ( 76.6 )
See accompanying notes to Condensed Consolidated Financial Statements.
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MillerKnoll, Inc.
Condensed Consolidated Balance Sheets
(Dollars in millions, except share data)
(Unaudited) March 4, 2023 May 28, 2022
ASSETS
Current Assets:
Cash and cash equivalents $ 217.1 $ 230.3
Accounts receivable, net of allowances of $ 6.8 and $ 9.7
351.5 348.9
Unbilled accounts receivable 38.2 32.0
Inventories, net 539.6 587.3
Prepaid expenses 120.7 112.1
Other current assets 9.0 7.3
Total current assets 1,276.1 1,317.9
Property and equipment, at cost 1,548.9 1,509.7
Less — accumulated depreciation ( 1,006.2 ) ( 928.2 )
Net property and equipment 542.7 581.5
Right of use assets 395.1 425.8
Goodwill 1,217.8 1,226.2
Indefinite-lived intangibles 499.4 501.0
Other amortizable intangibles, net of accumulated amortization of $ 175.1 and $ 134.7
320.4 362.4
Other noncurrent assets 131.3 99.2
Total Assets $ 4,382.8 $ 4,514.0
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 282.7 $ 355.1
Short-term borrowings and current portion of long-term debt 30.9 29.3
Accrued compensation and benefits 83.2 128.6
Short-term lease liability 78.1 79.9
Accrued warranty 21.2 18.8
Customer deposits 97.4 125.3
Other accrued liabilities 139.7 140.4
Total current liabilities 733.2 877.4
Long-term debt 1,415.1 1,379.2
Pension and post-retirement benefits 15.3 25.0
Lease liabilities 374.2 398.2
Other liabilities 304.5 300.2
Total Liabilities 2,842.3 2,980.0
Redeemable noncontrolling interests 106.6 106.9
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, 75,626,701 and 75,824,241 shares issued and outstanding in fiscal 2023 and 2022, respectively)
15.1 15.2
Additional paid-in capital 831.0 825.7
Retained earnings 693.3 693.3
Accumulated other comprehensive loss ( 105.5 ) ( 107.1 )
Total Stockholders' Equity 1,433.9 1,427.1
Total Liabilities, Redeemable Noncontrolling Interests, and Stockholders' Equity $ 4,382.8 $ 4,514.0
See accompanying notes to Condensed Consolidated Financial Statements.
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MillerKnoll, Inc.
Condensed Consolidated Statements of Cash Flows
(Dollars in millions) Nine Months Ended
(Unaudited) March 4, 2023 February 26, 2022
Cash Flows from Operating Activities:
Net earnings (loss) $ 46.0 $ ( 43.0 )
Adjustments to reconcile net earnings to net cash (used in) provided by operating activities:
Depreciation and amortization 115.9 150.3
Stock-based compensation 15.7 27.0
Amortization of deferred financing costs 3.5 2.6
Pension and post-retirement expenses ( 7.8 ) ( 6.2 )
(Gain) on sales of property and dealers — ( 2.0 )
Deferred taxes ( 1.2 ) ( 16.4 )
Restructuring expense 19.8 —
Impairment 36.6 15.5
Loss on extinguishment of debt — 13.4
Decrease (increase) in current assets 5.9 ( 224.9 )
(Decrease) increase in current liabilities ( 159.1 ) 35.2
(Decrease) in non-current liabilities ( 5.3 ) ( 8.6 )
Other, net 0.4 ( 0.8 )
Net Cash Provided by (Used in) Operating Activities 70.4 ( 57.9 )
Cash Flows from Investing Activities:
Notes receivables issued ( 4.4 ) —
Capital expenditures ( 60.6 ) ( 65.8 )
Acquisitions, net of cash received — ( 1,088.5 )
Proceeds from the sale of investments — 7.7
Proceeds from the sale of property and dealers — 2.8
Proceeds from loan on cash surrender value of life insurance 13.5 —
Other, net ( 1.7 ) ( 1.2 )
Net Cash (Used in) Investing Activities ( 53.2 ) ( 1,145.0 )
Cash Flows from Financing Activities:
Repayments of long-term debt ( 19.7 ) ( 56.6 )
Proceeds from issuance of debt, net of discounts — 1,007.0
Payments of deferred financing costs — ( 9.3 )
Proceeds from credit facility 720.2 815.7
Repayments of credit facility ( 664.7 ) ( 627.7 )
Payment of make whole premium on debt — ( 13.4 )
Dividends paid ( 42.9 ) ( 39.8 )
Common stock issued 4.5 6.8
Common stock repurchased and retired ( 15.9 ) ( 16.0 )
Other, net ( 3.6 ) ( 5.3 )
Net Cash (Used in) Provided by Financing Activities ( 22.1 ) 1,061.4
Effect of Exchange Rate Changes on Cash and Cash Equivalents ( 8.3 ) ( 9.0 )
Net Decrease in Cash and Cash Equivalents ( 13.2 ) ( 150.5 )
Cash and Cash Equivalents, Beginning of Period 230.3 396.4
Cash and Cash Equivalents, End of Period $ 217.1 $ 245.9
See accompanying notes to Condensed Consolidated Financial Statements.
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MillerKnoll, Inc.
Condensed Consolidated Statements of Stockholders' Equity
Nine Months Ended March 4, 2023
(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 loss 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
Net earnings — — — 16.0 — — 16.0
Other comprehensive income, net of tax — — — — 51.8 — 51.8
Stock-based compensation expense ( 2,476 ) — 5.5 — — — 5.5
Restricted and performance stock units released 8,763 — 0.1 — — — 0.1
Employee stock purchase plan issuances 44,010 — 0.7 — — — 0.7
Repurchase and retirement of common stock ( 3,222 ) — ( 0.1 ) — — — ( 0.1 )
Dividends declared ($ 0.1875 per share)
— — — ( 14.3 ) — — ( 14.3 )
Other — — 0.2 ( 0.4 ) — — ( 0.2 )
December 3, 2022 75,603,106 $ 15.1 $ 825.7 $ 706.6 $ ( 113.1 ) $ — $ 1,434.3
Net earnings — — — 0.4 — — 0.4
Other comprehensive income, net of tax — — — — 7.6 — 7.6
Stock-based compensation expense ( 15,563 ) — 4.8 — — — 4.8
Restricted and performance stock units released 44,926 — 0.3 — — — 0.3
Employee stock purchase plan issuances 36,375 — 0.8 — — — 0.8
Repurchase and retirement of common stock ( 69,927 ) — ( 1.6 ) — — — ( 1.6 )
Deferred stock unit — — 0.6 — — — 0.6
Directors' fees 27,784 — 0.6 — — — 0.6
Dividends declared ($ 0.1875 per share)
— — — ( 14.3 ) — — ( 14.3 )
Other — — ( 0.2 ) 0.6 — — 0.4
March 4, 2023 75,626,701 $ 15.1 $ 831.0 $ 693.3 $ ( 105.5 ) $ — $ 1,433.9
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Nine Months Ended February 26, 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 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
Net earnings — — — (1.7) — — ( 1.7 )
Other comprehensive income, net of tax — — — — ( 27.8 ) — ( 27.8 )
Stock-base compensation expense — — 7.0 — — — 7.0
Exercise of stock options 52,697 — 1.5 — — — 1.5
Restricted and performance stock units released 91,443 — 0.2 — — — 0.2
Employee stock purchase plan issuances 18,813 — 0.6 — — — 0.6
Repurchase and retirement of common stock ( 76,246 ) — ( 3.3 ) — — — ( 3.3 )
Forfeiture of shares ( 130,410 ) ( 0.1 ) — — — — ( 0.1 )
NCI adjustment — — 0.5 — — — 0.5
Dividends declared ($ 0.1875 per share)
— — — ( 14.4 ) — — ( 14.4 )
November 27, 2021 75,740,388 $ 15.1 $ 814.8 $ 727.6 $ ( 108.1 ) $ ( 0.2 ) $ 1,449.2
Net earnings — — — 14.4 — — 14.4
Other comprehensive income, net of tax — — — — 15.1 — 15.1
Stock-based compensation expense — — 4.9 — — — 4.9
Exercise of stock options 11,053 — 0.3 — — — 0.3
Restricted and performance stock units released 45,417 — — — — — —
Employee stock purchase plan issuances 20,437 — 0.7 — — — 0.7
Directors Fees 23,255 0.1 1.5 — — — 1.6
Repurchase and retirement of common stock ( 41,346 ) — ( 1.6 ) — — — ( 1.6 )
Deferred compensation plan — — — — — 0.2 0.2
Forfeiture of shares ( 652 ) — — — — — —
Dividends declared ($ 0.1875 per share)
— — — ( 14.3 ) — — ( 14.3 )
February 26, 2022 75,798,552 $ 15.2 $ 820.6 $ 727.7 $ ( 93.0 ) $ — $ 1,470.5
See accompanying notes to Condensed Consolidated Financial Statements.
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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 4. "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 change in the 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, 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 March 4, 2023. Operating results for the three and nine months ended March 4, 2023 are not necessarily indicative of the results that may be expected for the year ending June 3, 2023 ("fiscal 2023"). These Condensed Consolidated Financial Statements should 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, the Company elected to change the method of accounting for the cost of certain inventories within the Americas segment from the last-in, first-out method (“LIFO”) to first-in, first-out method (“FIFO”). With this change
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there are no longer any inventories accounted for under the LIFO method. The Company has 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 Nine Months Ended
(In millions) March 4, 2023 February 26, 2022 March 4, 2023 February 26, 2022
Net Sales:
Single performance obligation
Product revenue $ 919.7 $ 953.3 $ 2,924.0 $ 2,632.0
Multiple performance obligations
Product revenue 60.9 69.9 193.7 197.9
Service revenue 0.8 2.5 2.6 7.3
Other 3.3 3.8 10.1 8.3
Total $ 984.7 $ 1,029.5 $ 3,130.4 $ 2,845.5
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.
The Other category primarily consists of textiles, uncategorized product sales, and service sales.
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Revenue disaggregated by product type and reportable segment is provided in the table below:
Three Months Ended Nine Months Ended
(In millions) March 4, 2023 February 26, 2022 March 4, 2023 February 26, 2022
Americas Contract:
Workplace $ 313.5 $ 326.1 $ 994.3 $ 880.1
Performance Seating 102.8 112.8 336.7 320.0
Lifestyle 60.8 58.4 200.3 156.2
Other 7.5 12.1 20.4 33.7
Total Americas Contract $ 484.6 $ 509.4 $ 1,551.7 $ 1,390.0
International Contract & Specialty:
Workplace $ 37.5 $ 35.1 $ 131.4 $ 103.8
Performance Seating 63.3 62.0 197.9 170.2
Lifestyle 92.4 91.2 299.0 244.2
Other 49.3 52.7 151.6 136.9
Total International Contract & Specialty $ 242.5 $ 241.0 $ 779.9 $ 655.1
Global Retail:
Workplace $ 20.3 $ 31.3 $ 69.7 $ 83.1
Performance Seating 59.8 67.4 161.9 195.7
Lifestyle 177.2 179.8 565.8 520.1
Other 0.3 0.6 1.4 1.5
Total Global Retail $ 257.6 $ 279.1 $ 798.8 $ 800.4
Total $ 984.7 $ 1,029.5 $ 3,130.4 $ 2,845.5
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 and nine months ended March 4, 2023, the Company recognized Net sales of $ 9.9 million and $ 114.7 million respectively, related to customer deposits that were included in the balance sheet as of May 28, 2022.
4. Acquisitions
Knoll, Inc.
On July 19, 2021, the Company completed the acquisition of 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, $ 1.2 million and $ 28.8 million were recorded, respectively, in the three and nine months ended February 26, 2022.
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 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):
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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 13. 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 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 is being 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:
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(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 and nine months ended February 26, 2022, 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 Knoll acquisition. 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.
(In millions) Three Months Ended February 26, 2022 Nine Months Ended February 26, 2022
Net sales $ 1,029.5 $ 2,999.7
Net income (loss) attributable to MillerKnoll, Inc. $ 16.9 $ ( 0.8 )
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5. Inventories, net
(In millions) March 4, 2023 May 28, 2022
Finished goods and work in process $ 397.1 $ 441.6
Raw materials 142.5 145.7
Total $ 539.6 $ 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 March 4, 2023 and May 28, 2022:
(In millions) Americas Contract International Contract & Specialty Global Retail Total
May 28, 2022
Goodwill $ 530.1 $ 341.0 $ 480.6 $ 1,351.7
Foreign currency translation adjustments ( 3.4 ) ( 2.4 ) ( 2.6 ) ( 8.4 )
Accumulated impairment losses — ( 36.7 ) ( 88.8 ) ( 125.5 )
March 4, 2023 $ 526.7 $ 301.9 $ 389.2 $ 1,217.8
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 ( 1.6 )
March 4, 2023 $ 499.4
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, 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, 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.
During the third quarter of fiscal year 2023, the Company assessed changes in circumstances that occurred during the quarter to determine if it was more likely than not that the fair values of any reporting units were below their carrying amounts. Although our annual impairment test is performed during the fourth quarter, we perform this qualitative assessment each interim reporting period.
While there was no single determinate event, the consideration in totality of several factors that developed during the third quarter of fiscal year 2023 led us to conclude that it was more likely than not that the fair value of the Global Retail reporting unit was below its carrying amount. These factors included: (i) the decision to discontinue stand-alone operations of the Fully brand and (ii) the assessment of our third quarter results, for which the performance of the Global Retail reporting unit was below management's expectations.
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Accordingly, the Company performed an interim quantitative impairment analysis as of March 4, 2023 to determine the fair value of the Global Retail reporting unit as compared to the carrying value. 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 1 % and therefore has a heightened risk of future impairments if any assumptions, estimates or market factors change in the future. The Global Retail reporting unit has a goodwill carrying amount of $ 389.2 million as of March 4, 2023.
The Company generally uses the discounted cash flow method under a weighting of the income and market approach to estimate the fair value of our reporting units. These approaches are based on a discounted cash flow analysis and observable comparable company information that use several inputs, including:
• actual and forecasted revenue growth rates and operating margins,
• discount rates based on the reporting unit's weighted average cost of capital, and
• revenue and EBITDA of comparable companies
The Company has selected the assumptions used in the financial forecasts using historical data, supplemented by current and anticipated market conditions, management’s long-term strategic plans, and guideline companies.
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. Management has not identified any events or changes in circumstances that may indicate that an indefinite-lived intangible is more likely than not to be impaired as of the third quarter of fiscal year 2023.
7. Employee Benefit Plans
The following table summarizes the components of net periodic benefit cost for the Company's defined benefit pension plans:
Pension Benefits
Three Months Ended March 4, 2023 Three Months Ended February 26, 2022
(In millions) Domestic International Domestic International
Service cost $ — $ — $ 0.1 $ —
Interest cost 1.5 0.8 1.1 0.8
Expected return on plan assets (1)
( 2.0 ) ( 1.2 ) ( 2.1 ) ( 1.8 )
Net amortization loss — 0.6 — 1.7
Net periodic benefit (income) cost $ ( 0.5 ) $ 0.2 $ ( 0.9 ) $ 0.7
Nine Months Ended March 4, 2023 Nine Months Ended February 26, 2022
(In millions) Domestic International Domestic International
Service cost $ — $ — $ 0.3 $ —
Interest cost 4.5 2.4 2.6 2.5
Expected return on plan assets (1)
( 6.0 ) ( 3.5 ) ( 5.2 ) ( 5.4 )
Net amortization loss — 1.8 — 5.0
Net periodic benefit (income) cost $ ( 1.5 ) $ 0.7 $ ( 2.3 ) $ 2.1
(1) The weighted-average expected long-term rate of return on plan assets is 6.00 %.
In the third quarter of fiscal 2023, the Company recorded a pension settlement charge of $ 0.5 million that resulted from cash payments of lump sum elections.
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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 and nine months ended:
Three Months Ended Nine Months Ended
March 4, 2023 February 26, 2022 March 4, 2023 February 26, 2022
Numerators :
Numerator for both basic and diluted EPS, Net earnings (loss) attributable to MillerKnoll, Inc. - in millions $ 0.4 $ 14.4 $ 42.2 $ ( 48.7 )
Denominators :
Denominator for basic EPS, weighted-average common shares outstanding 75,463,071 75,461,462 75,442,780 72,356,143
Potentially dilutive shares resulting from stock plans 603,144 1,049,972 593,364 —
Denominator for diluted EPS 76,066,215 76,511,434 76,036,144 72,356,143
Antidilutive equity awards not included in weighted-average common shares - diluted 2,562,710 307,218 1,161,186 1,320,891
9. Stock-Based Compensation
The following table summarizes the stock-based compensation expense and related income tax effect for the three and nine months ended:
Three Months Ended Nine Months Ended
(In millions) March 4, 2023 February 26, 2022 March 4, 2023 February 26, 2022
Stock-based compensation expense $ 4.8 $ 4.9 $ 15.7 $ 27.0
Related income tax effect $ 1.2 $ 1.2 $ 3.8 $ 6.6
The decrease in stock-based compensation expense for the nine months ended March 4, 2023 as compared to the same period of the prior year was driven primarily by the prior year's acceleration of stock-based compensation award expense related to the targeted workforce reductions implemented subsequent to the Knoll acquisition.
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 and nine months ended March 4, 2023 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 31.2 % and 15.6 %, respectively, for the three month periods ended March 4, 2023 and February 26, 2022. The year over year change in the effective tax rate for the three months ended March 4, 2023 resulted from the current year quarter reporting minimal pre-tax book income with unfavorable discrete compensation impacts in the United States. The same quarter of the prior year had no comparable impacts.
For the three months ended March 4, 2023, the effective tax rate is higher than the United States federal statutory rate due to an unfavorable tax adjustment in the current quarter related to stock compensation and the absence in the current quarter of favorable tax adjustments in the prior quarter related to acquisition and restructure charges. For the three months ended February 26, 2022, the effective tax rate was lower than the United States federal statutory rate due to the impact of applying the estimated annual effective tax rate to the year to date pre-tax loss.
The effective tax rates were 19.5 % and 19.8 %, respectively, for the nine months ended March 4, 2023 and February 26, 2022. The year over year decrease in the effective rate for the nine months ended March 4, 2023 resulted from favorable foreign tax
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credit impacts in the United States whereas the prior year period had no comparable impacts. For the nine months ended March 4, 2023, 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 nine months ended February 26, 2022, the effective tax rate is lower than the United States federal statutory rate due to the impact of applying the estimated annual effective tax rate to the year to date pre-tax loss, which included an adjustment impacted by non-deductible Knoll acquisition related costs.
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 and nine months ended March 4, 2023 and February 26, 2022.
The Company's recorded liability for potential interest and penalties related to uncertain tax benefits was:
(In millions) March 4, 2023 May 28, 2022
Liability for interest and penalties $ 0.9 $ 0.9
Liability for uncertain tax positions, current $ 2.0 $ 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, 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) March 4, 2023 May 28, 2022
Carrying value $ 1,462.8 $ 1,427.9
Fair value $ 1,393.0 $ 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 March 4, 2023 and May 28, 2022.
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(In millions) March 4, 2023 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 $ 16.4 $ — $ 31.8 $ —
Foreign currency forward contracts — 1.1 — 0.4
Deferred compensation plan — 15.4 — 15.0
Total $ 16.4 $ 16.5 $ 31.8 $ 15.4
Financial Liabilities
Foreign currency forward contracts — 0.7 — 1.0
Total $ — $ 0.7 $ — $ 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 March 4, 2023 and May 28, 2022.
(In millions) March 4, 2023 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 $ 74.4 $ 31.9
Total $ 74.4 $ 31.9
Financial Liabilities
Interest rate swap agreement Other liabilities $ 0.2 $ —
Total $ 0.2 $ —
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
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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.
In February 2023, the Company entered into an additional 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 3.95 % fixed interest rate and adjustment % plus applicable margin as of the forward start date. "Spread adjusted Term SOFR" means Term SOFR plus an adjustment % that varies with tenor. The Company typically selects a one month tenor and that is calculated as the one month Term SOFR rate plus 0.11448 %.
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 March 4, 2023. 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 1.910 %
June 2017 Interest Rate Swap $ 75.0 January 3, 2018 January 3, 2028 2.348 %
January 2022 Interest Rate Swap $ 575.0 January 31, 2022 January 29, 2027 1.650 %
March 2023 Interest Rate Swap $ 150.0 March 3, 2023 January 3, 2029 3.950 %
The swaps above effectively converted indebtedness up to the notional amounts from a SOFR-based floating interest rate plus applicable margin of 0.11448 % to an effective fixed rate plus 0.11448 % 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 and nine months ended:
Three Months Ended Nine Months Ended
(In millions) March 4, 2023 February 26, 2022 March 4, 2023 February 26, 2022
Gain recognized in Other comprehensive loss (effective portion) $ 10.3 $ 10.2 $ 31.8 $ 13.2
Gain (Loss) reclassified from Accumulated other comprehensive loss into earnings $ 4.9 $ ( 1.1 ) $ 6.9 $ ( 3.1 )
There were no gains or losses recognized in earnings for hedge ineffectiveness for the three and nine month periods ended March 4, 2023 and February 26, 2022. The amount of loss expected to be reclassified from Accumulated other comprehensive loss into earnings during the next twelve months is $ 28.3 million, net of tax is $ 21.2 million.
Redeemable Noncontrolling Interests
Changes in the Company's redeemable noncontrolling interest in HAY for the nine months ended March 4, 2023 and February 26, 2022 are as follows:
(In millions) March 4, 2023 February 26, 2022
Beginning Balance $ 106.9 $ 77.0
Net income attributable to redeemable noncontrolling interests 3.8 5.7
Dividend attributable to redeemable noncontrolling interests ( 3.2 ) ( 6.6 )
Cumulative translation adjustments attributable to redeemable noncontrolling interests — ( 2.0 )
Foreign currency translation adjustments ( 0.9 ) ( 6.0 )
Ending Balance $ 106.6 $ 68.1
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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.
Changes in the warranty reserve for the stated periods were as follows:
Three Months Ended Nine Months Ended
(In millions) March 4, 2023 February 26, 2022 March 4, 2023 February 26, 2022
Accrual Balance — beginning $ 74.1 $ 69.9 $ 73.2 $ 60.1
Accrual for warranty matters 6.0 2.8 17.7 12.0
Settlements and adjustments ( 5.6 ) ( 3.8 ) ( 16.4 ) ( 13.3 )
Acquired through business acquisition — 5 — 15.1
Accrual Balance — ending $ 74.5 $ 73.9 $ 74.5 $ 73.9
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 March 4, 2023, the Company had a maximum financial exposure related to performance bonds totaling approximately $ 8.2 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 March 4, 2023 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 March 4, 2023, the Company had a maximum financial exposure from these standby letters of credit totaling approximately $ 14.1 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 with respect to these arrangements as of March 4, 2023 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.
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13. Short-Term Borrowings and Long-Term Debt
Short-term borrowings and long-term debt as of March 4, 2023 and May 28, 2022 consisted of the following:
(In millions) March 4, 2023 May 28, 2022
Syndicated revolving line of credit, due July 2026 $ 468.5 $ 413.0
Term Loan A, 6.4821 %, due July 2026
375.0 390.0
Term Loan B, 6.7321 %, due July 2028
617.2 621.8
Supplier financing program 2.1 3.1
Total debt $ 1,462.8 $ 1,427.9
Less: Unamortized discount and issuance costs ( 16.8 ) ( 19.4 )
Less: Current debt ( 30.9 ) ( 29.3 )
Long-term debt $ 1,415.1 $ 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 rate interest borrowing capacity that matures in July 2026, replacing the previous $ 500 million 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. In January 2023, the company entered into the 2nd Amendment to the credit agreement which transitioned the benchmark rate from LIBOR to the Secured Overnight Financing Rate ("SOFR") for U.S. dollar borrowings. SOFR is the recommended risk-free reference rate of the Federal Reserve Board and Alternative Reference Rates Committee, as defined within the credit agreement. During the nine months ended February 26, 2022, 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 total principal payments on term loan "A" and "B" during the nine months ended March 4, 2023 in the amount of $ 15.0 million and $ 4.7 million, respectively. The Company made total principal payments on term loan "A" and "B" during the nine months ended February 26, 2022 in the amount of $ 5.0 million and $ 1.6 million, respectively.
(In millions) March 4, 2023 May 28, 2022
Syndicated revolving line of credit borrowing capacity $ 725.0 $ 725.0
Less: Borrowings under the syndicated revolving line of credit 468.5 413.0
Less: Outstanding letters of credit 14.1 15.4
Available borrowings under the syndicated revolving line of credit
$ 242.4 $ 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”. As of March 4, 2023, the liability related to the supplier financing program is $ 2.1 million.
14. Accumulated Other Comprehensive Loss
The following table provides an analysis of the changes in accumulated other comprehensive loss for the nine months ended March 4, 2023 and February 26, 2022:
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(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 ( 30.6 ) — 24.9 ( 5.7 )
Reclassification from accumulated other comprehensive loss - Other, net — 0.6 6.9 7.5
Tax benefit — ( 0.2 ) — ( 0.2 )
Net reclassifications — 0.4 6.9 7.3
Net current period other comprehensive (loss) income ( 30.6 ) 0.4 31.8 1.6
Balance at March 4, 2023 $ ( 124.5 ) $ ( 36.5 ) $ 55.5 $ ( 105.5 )
Balance at May 29, 2021 $ ( 3.9 ) $ ( 50.4 ) $ ( 10.8 ) $ ( 65.1 )
Other comprehensive (loss) income, net of tax before reclassifications ( 46.7 ) — 16.3 ( 30.4 )
Reclassification from accumulated other comprehensive loss - Other, net — 6.4 ( 3.1 ) 3.3
Tax benefit — ( 0.8 ) — ( 0.8 )
Net reclassifications — 5.6 ( 3.1 ) 2.5
Net current period other comprehensive (loss) income ( 46.7 ) 5.6 13.2 ( 27.9 )
Balance at February 26, 2022 $ ( 50.6 ) $ ( 44.8 ) $ 2.4 $ ( 93.0 )
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 and Muuto 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 activities 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.
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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 Nine Months Ended
(In millions) March 4, 2023 February 26, 2022 March 4, 2023 February 26, 2022
Net Sales:
Americas $ 484.6 $ 509.4 $ 1,551.7 $ 1,390.0
International & Specialty 242.5 241.0 779.9 655.1
Retail 257.6 279.1 798.8 800.4
Total $ 984.7 $ 1,029.5 $ 3,130.4 $ 2,845.5
Operating Earnings (Loss):
Americas $ 32.5 $ ( 8.6 ) $ 78.2 $ ( 30.1 )
International & Specialty 25.3 17.0 81.5 38.4
Retail ( 24.5 ) 36.3 ( 4.7 ) 97.1
Corporate ( 12.1 ) ( 15.5 ) ( 44.3 ) ( 122.6 )
Total $ 21.2 $ 29.2 $ 110.7 $ ( 17.2 )
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, as well as non-cash severance, including accelerated equity award compensation expense. The Company also incurs expenses that are an integral component of, and directly attributable 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 acquisition, the Company announced a multi-year program (the "Knoll Integration") designed to reduce costs and integrate and optimize operations of the combined organization. The Company currently expects that the Knoll Integration will result in pre-tax cash costs that are expected to be approximately $ 140 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 the reorganization and consolidation of facilities as well as 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 Knoll acquisition.
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For the nine months ended March 4, 2023, we incurred $ 12.7 million of costs related to the Knoll Integration including: $ 3.1 million of severance and employee benefit costs, $ 3.6 million of lease termination fees, and $ 6.0 million of other integration costs.
For the nine months ended February 26, 2022, we incurred $ 101.7 million of costs related to the Knoll Integration including: $ 49.9 million of severance and employee benefit costs, $ 15.5 million of non-cash asset impairments, $ 13.4 million of non-cash costs related to debt-extinguishment in the financing of the transaction, and $ 22.9 million of other integration costs.
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 nine months ended March 4, 2023:
(In millions) Severance and Employee Benefit Exit and Disposal Activities Total
May 29, 2022 $ 1.4 $ — $ 1.4
Integration Costs 3.1 3.6 6.7
Amounts Paid ( 2.3 ) ( 3.6 ) ( 5.9 )
Non-cash costs ( 0.2 ) — ( 0.2 )
March 4, 2023 $ 2.0 $ — $ 2.0
The Company expects that a substantial portion of the liability for the Knoll Integration as of March 4, 2023 will be paid in the balance of fiscal year 2023.
The following is a summary of integration expenses by segment for the periods indicated:
Three Months Ended Nine Months Ended
(In millions) March 4, 2023 February 26, 2022 March 4, 2023 February 26, 2022
Americas Contract $ 2.2 $ 0.9 $ 6.2 $ 21.8
International Contract & Specialty 0.5 — 2.0 —
Retail — — 0.2 —
Corporate 1.3 5.0 4.3 79.9
Total $ 4.0 $ 5.9 $ 12.7 $ 101.7
2023 Restructuring Plan
During the first quarter of fiscal year 2023, the Company announced a restructuring plan ("2023 restructuring plan") to reduce expenses. These restructuring activities included voluntary and involuntary reductions in workforces. As the result of these actions, the Company projects an annualized expense reduction of approximately $ 30 million to $ 35 million. In connection with the 2023 restructuring plan, the Company incurred severance and related charges of $ 4.6 million and $ 19.8 million for the three and nine months ended March 4, 2023, respectively. These charges consisted solely of cash expenditures for employee termination and severance costs to be paid in fiscal 2023.
The following table provides an analysis of the changes in the restructuring cost reserve for the nine months ended March 4, 2023:
(In millions) Severance and Employee-Related
May 28, 2022 $ —
Restructuring Costs 19.8
Amounts Paid ( 12.8 )
March 4, 2023 $ 7.0
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The following is a summary of restructuring costs by segment for the periods indicated:
Three Months Ended Nine Months Ended
(In millions) March 4, 2023 February 26, 2022 March 4, 2023 February 26, 2022
Americas Contract $ 4.4 $ — $ 17.5 $ —
International Contract & Specialty — — 0.7 —
Retail 0.2 — 1.6 —
Total $ 4.6 $ — $ 19.8 $ —
Impairment of Fully
In the third quarter of 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 of the Global Retail business. As a result of this decision, the Company recorded asset Impairment charges of $ 37.2 million in the third quarter of fiscal 2023.
The table below provides information related to the impairments recognized during the third quarter of fiscal 2023. These charges are included in "Impairment charges" and "Cost of sales" within the Consolidated Statements of Comprehensive Income.
(In millions) Impairment Charge
Inventory $ 15.7
Property and equipment 3.8
Right of use asset 6.1
Tradename 11.6
Total $ 37.2
17. Variable Interest Entities
The Company entered into notes receivable with certain of its third-party independently owned dealers that are deemed to be variable interests in variable interest entities. The carrying value of these notes receivable was $ 5.7 million and $ 1.2 million as of March 4, 2023 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.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.