MILLERKNOLL, INC. 10-Q

Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except share data) The following is management's discussion and analysis of certain significant factors that affected the Company's financial condition, earnings and cash flows during the periods included in the accompanying Condensed Consolidated Financial Statements and should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended June 3, 2023. References to “Notes” are to the footnotes included in the accompanying Condensed Consolidated Financial Statements. Business Overview The Company researches, designs, manufactures, sells, and distributes interior furnishings for use in various environments including residential, office, healthcare, and educational settings and provides related services that support organizations and individuals all over the world. The Company's products are sold primarily through independent contract office furniture dealers, direct customer sales, owned and independent retailers, direct-mail catalogs, and the Company’s eCommerce platforms. The following is a summary of results for the three months ended December 2, 2023: • Net sales were $949.5 million and orders were $944.0 million, representing a decrease of 11.0% and 6.8%, respectively, when compared to the same quarter of the prior year. On an organic basis, which excludes the impact of foreign currency translation and the impact of the closure of the Fully business, Net sales were $941.6 million (*) and orders were $934.0 million (*) , representing an organic decrease of 10.1% and 6.0%, respectively, when compared to the same quarter of the prior year. • Gross margin in the second quarter was 39.2% as compared to 34.5% for the same quarter of the prior year. The increase in Gross margin was driven primarily by the impact of price increase actions, reduced costs associated with commodities, inventory handling and freight, as well as the continued realization of synergies associated with the Knoll integration. • Operating expenses decreased by $17.3 million or 5.3% as compared to the same quarter of the prior year. The decrease was driven primarily by the realization of cost synergies as a result of optimization of our organizational structure, a reduction in restructuring costs as compared to the same prior of the prior year as well as lower variable costs due to decreased sales. • As of the end of the second quarter, the Company has captured $147 million in annualized run rate synergies following the close of the Knoll acquisition in the first quarter of Fiscal 2022. The Company continues to make further progress on integration plans and expects total run-rate cost synergies to equal $160 million per year by July 2024 (three years following the acquisition closing date). • The effective tax rate was 21.4% compared to 19.8% for the same quarter of the prior year. The prior year tax rate benefited from favorable tax credit benefits which outpaced the current year benefit. • Diluted earnings per share was $0.45 as compared to earnings per share of $0.21 in the prior year. Excluding integration related costs, restructuring costs, and the amortization of intangible assets purchased as part of the Knoll acquisition, adjusted diluted earnings per share was $0.59 (*) , a 28.3% (*) increase as compared to prior year adjusted diluted earnings per share. (*) Non-GAAP measurements; see accompanying reconciliations and explanations under the heading "Reconciliation of Non-GAAP Financial Measures." The following summary includes the Company's view of the economic environment in which it operates: • During the second quarter, demand levels for the Company's products continued to be impacted by general economic uncertainty around the world driven by geopolitical concerns, persistent inflationary affects, and elevated market interest rates. The Company believes that our second quarter financial results reflect how our diversified business model, with brands across multiple channels, customer segments and geographies, provides risk diversification, and opportunities for long-term future growth. • The Americas Contract segment in the second quarter reported Net sales totaling $476.1 million, down 10.1% compared to the prior year period on a reported basis and down 10.3% (*) organically. Americas Contract had new orders of $437.4 million, which was a decrease of 7.7% from the prior year, and down 8.1% (*) on an organic basis. 25 • The International Contract & Specialty segment delivered Net sales in the second quarter of $241.2 million, a decrease of 8.9% from the year-ago period on a reported basis and a decrease of 10.4% (*) organically. New orders in this segment totaled $233.9 million, representing a year-over-year decrease of 3.2% on a reported basis and a decrease of 5.1% (*) organically. • Net sales in the second quarter for the Global Retail segment totaled $232.2 million, a decrease of 14.7% over the same quarter last year on a reported basis and a decrease of 9.4% (*) organically. Orders in the quarter totaled $272.7 million, down 8.4% compared to the same period last year on a reported basis and down 3.0% (*) organically. (*) Non-GAAP measurements; see accompanying reconciliations and explanations under the heading "Reconciliation of Non-GAAP Financial Measures." The Company's fiscal year is the 52 or 53 week period ending on the Saturday closest to May 31. The fiscal year ending June 1, 2024 contains 52 weeks, while fiscal year ended June 3, 2023 ("fiscal 2023") contained 53 weeks. The first quarter of fiscal 2024 contained 13 weeks and the first quarter of fiscal 2023 contained 14 weeks. This is a factor that should be considered when comparing the Company's year to date financial results to the prior year period. The remaining sections within Item 2 include additional analysis of the three and six months ended December 2, 2023, including discussion of significant variances compared to the prior year periods. Reconciliation of Non-GAAP Financial Measures This report contains non-GAAP financial measures that are not in accordance with, nor an alternative to, generally accepted accounting principles (GAAP) and may be different from non-GAAP measures presented by other companies. These non-GAAP financial measures are not measurements of our financial performance under GAAP and should not be considered an alternative to the related GAAP measurement. These non-GAAP measures have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Our presentation of non-GAAP measures should not be construed as an indication that our future results will be unaffected by unusual or infrequent items. We compensate for these limitations by providing equal prominence of our GAAP results. Reconciliations of these non-GAAP measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are provided in the financial tables included within this report. The Company believes these non-GAAP measures are useful for investors as they provide financial information on a more comparative basis for the periods presented. The non-GAAP financial measures referenced within this report include: Adjusted Earnings per Share and Organic Growth (Decline). Adjusted Earnings per Share represents reported diluted earnings per share excluding the impact from amortization of Knoll purchased intangibles, integration charges, restructuring expenses, and the related tax effect of these adjustments. These adjustments are described further below. Organic Growth (Decline) represents the change in sales and orders, excluding currency translation effects, the impact of an additional week in the fiscal 2023 and the impact of the closure of the Fully business. The adjustments made to arrive at these non-GAAP financial measures are as follows: • Amortization of Knoll Purchased Intangibles: Includes expenses associated with the amortization of acquisition related intangibles acquired as part of the Knoll acquisition. The revenue generated by the associated intangible assets has not been excluded from the related non-GAAP financial measure. We exclude the impact of the amortization of Knoll purchased intangibles as such non-cash amounts were significantly impacted by the size of the Knoll acquisition. Furthermore, we believe that this adjustment enables better comparison of our results as Amortization of Knoll Purchased Intangibles will not recur in future periods once such intangible assets have been fully amortized. Any future acquisitions may result in the amortization of additional intangible assets. Although we exclude the Amortization of Knoll Purchased Intangibles in these non-GAAP measures, we believe that it is important for investors to understand that such intangible assets were recorded as part of purchase accounting and contribute to revenue generation. • Integration Charges: Knoll integration-related costs include severance, accelerated stock-based compensation expenses, asset impairment charges, and expenses related to synergy realization efforts and reorganization initiatives. • Restructuring charges: Includes actions involving targeted workforce reductions. • Tax related items: We excluded the income tax benefit/provision effect of the tax related items from our non-GAAP measures because they are not associated with the tax expense on our ongoing operating results. 26 The following tables reconciles Net sales to Net sales, organic for the periods ended as indicated below: Three Months Ended December 2, 2023 Americas Contract International Contract & Specialty Global Retail Total Net sales, as reported $ 476.1 $ 241.2 $ 232.2 $ 949.5 % change from PY (10.1) % (8.9) % (14.7) % (11.0) % Adjustments Currency translation effects (1) (0.8) (3.9) (3.2) (7.9) Net sales, organic $ 475.3 $ 237.3 $ 229.0 $ 941.6 % change from PY (10.3) % (10.4) % (9.4) % (10.1) % Three Months Ended December 3, 2022 Americas Contract International Contract & Specialty Global Retail Total Net sales, as reported $ 529.7 $ 264.9 $ 272.3 $ 1,066.9 Adjustments Fully closure — — (19.5) (19.5) Net sales, organic $ 529.7 $ 264.9 $ 252.8 $ 1,047.4 (1) Currency translation effects represent the estimated net impact of translating current period sales and orders using the average exchange rates applicable to the comparable prior year period Six Months Ended December 2, 2023 Americas Contract International Contract & Specialty Global Retail Total Net sales, as reported $ 966.5 $ 469.5 $ 431.2 $ 1,867.2 % change from PY (9.4) % (12.6) % (20.3) % (13.0) % Adjustments Currency translation effects (1) (1.2) (6.9) (5.2) (13.3) Net sales, organic $ 965.3 $ 462.6 $ 426.0 $ 1,853.9 % change from PY (6.1) % (10.7) % (11.4) % (8.5) % Six Months Ended December 3, 2022 Americas Contract International Contract & Specialty Global Retail Total Net sales, as reported $ 1,067.1 $ 537.4 $ 541.2 $ 2,145.7 Adjustments Fully closure — — (42.3) (42.3) Impact of extra week in FY23 (38.7) (19.6) (18.2) (76.5) Net sales, organic $ 1,028.4 $ 517.8 $ 480.7 $ 2,026.9 (1) Currency translation effects represent the estimated net impact of translating current period sales and orders using the average exchange rates applicable to the comparable prior year period 27 The following tables reconcile orders as reported to organic orders for the periods ended as indicated below: Three Months Ended December 2, 2023 Americas Contract International Contract & Specialty Global Retail Total Orders, as reported $ 437.4 $ 233.9 $ 272.7 $ 944.0 % change from PY (7.7) % (3.2) % (8.4) % (6.8) % Adjustments Currency translation effects (1) (1.9) (4.5) (3.6) (10.0) Orders, organic $ 435.5 $ 229.4 $ 269.1 $ 934.0 % change from PY (8.1) % (5.1) % (3.0) % (6.0) % Three Months Ended December 3, 2022 Americas Contract International Contract & Specialty Global Retail Total Orders, as reported $ 474.1 $ 241.7 $ 297.6 $ 1,013.4 Adjustments Fully closure — — (20.3) (20.3) Orders, organic $ 474.1 $ 241.7 $ 277.3 $ 993.1 (1) Currency translation effects represent the estimated net impact of translating current period sales and orders using the average exchange rates applicable to the comparable prior year period. 28 Six Months Ended December 2, 2023 Americas Contract International Contract & Specialty Global Retail Total Orders, as reported $ 924.7 $ 461.8 $ 471.2 $ 1,857.7 % change from PY (6.2) % (6.5) % (13.9) % (8.3) % Adjustments Currency translation effects (1) (4.2) (7.4) (5.7) (17.3) Orders, organic $ 920.5 $ 454.4 $ 465.5 $ 1,840.4 % change from PY (3.0) % (4.4) % (4.4) % (3.7) % Six Months Ended December 3, 2022 Americas Contract International Contract & Specialty Global Retail Total Orders, as reported $ 985.4 $ 494.1 $ 547.0 $ 2,026.5 Adjustments Impact of extra week in FY23 (36.2) (18.9) (16.6) (71.7) Fully closure — — (43.3) (43.3) Orders, organic $ 949.2 $ 475.2 $ 487.1 $ 1,911.5 (1) Currency translation effects represent the estimated net impact of translating current period sales and orders using the average exchange rates applicable to the comparable prior year period. The following table reconciles earnings per share - diluted to adjusted earnings per share - diluted for the periods ended as indicated below: Three Months Ended Six Months Ended December 2, 2023 December 3, 2022 December 2, 2023 December 3, 2022 Earnings per share - diluted $ 0.45 $ 0.21 $ 0.67 $ 0.55 Add: Amortization of Knoll purchased intangibles 0.08 0.08 0.16 0.16 Add: Integration charges 0.09 0.06 0.16 0.12 Add: Restructuring charges 0.02 0.19 0.08 0.20 Tax impact on adjustments (0.05) (0.08) (0.11) (0.13) Adjusted earnings per share - diluted $ 0.59 $ 0.46 $ 0.96 $ 0.90 Weighted average shares outstanding (used for calculating adjusted earnings per share) – diluted 74,240,293 75,878,078 75,077,712 76,042,640 29 Key Highlights The following table presents certain key highlights from the results of operations for the three and six months ended: Three Months Ended Six Months Ended (In millions, except share data) December 2, 2023 December 3, 2022 % Change December 2, 2023 December 3, 2022 % Change Net sales $ 949.5 $ 1,066.9 (11.0) % $ 1,867.2 $ 2,145.7 (13.0) % Cost of sales 577.5 699.3 (17.4) % 1,137.1 1,406.0 (19.1) % Gross margin 372.0 367.6 1.2 % 730.1 739.7 (1.3) % Operating expenses 311.6 328.9 (5.3) % 629.4 650.2 (3.2) % Operating earnings 60.4 38.7 56.1 % 100.7 89.5 12.5 % Other expenses, net 16.1 17.1 (5.8) % 35.3 34.2 3.2 % Earnings before income taxes and equity income 44.3 21.6 105.1 % 65.4 55.3 18.3 % Income tax expense 9.5 4.3 120.9 % 14.6 10.6 37.7 % Equity (loss) income from nonconsolidated affiliates, net of tax (0.4) 0.2 (300.0) % (0.3) 0.2 (250.0) % Net earnings 34.4 17.5 96.6 % 50.5 44.9 12.5 % Net earnings attributable to redeemable noncontrolling interests 0.9 1.5 n/a 0.3 3.1 n/a Net earnings attributable to MillerKnoll, Inc. $ 33.5 $ 16.0 109.4 % $ 50.2 $ 41.8 20.1 % Earnings per share - basic $ 0.45 $ 0.21 114.3 % $ 0.67 $ 0.55 21.8 % Orders $ 944.0 $ 1,013.4 (6.8) % $ 1,857.7 $ 2,026.5 (8.3) % Backlog $ 688.5 $ 815.4 (15.6) % The following table presents select components of the Company's Condensed Consolidated Statements of Comprehensive (Loss) Income as a percentage of Net sales, for the three and six months ended: Three Months Ended Six Months Ended December 2, 2023 December 3, 2022 December 2, 2023 December 3, 2022 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 60.8 65.5 60.9 65.5 Gross margin 39.2 34.5 39.1 34.5 Operating expenses 32.8 30.8 33.7 30.3 Operating earnings 6.4 3.6 5.4 4.2 Other expenses, net 1.7 1.6 1.9 1.6 Earnings before income taxes and equity income 4.7 2.0 3.5 2.6 Income tax expense 1.0 0.4 0.8 0.5 Equity (loss) income from nonconsolidated affiliates, net of tax — — — — Net earnings 3.6 1.6 2.7 2.1 Net earnings attributable to redeemable noncontrolling interests 0.1 0.1 — 0.1 Net earnings attributable to MillerKnoll, Inc. 3.5 1.5 2.7 1.9 30 Net Sales The following chart presents graphically the primary drivers of the year-over-year change in Net sales for the three and six months ended December 2, 2023. The amounts presented in the graph are expressed in millions and have been rounded. Net sales decreased $117 million or 11.0% in the second quarter of fiscal 2024 compared to the second quarter of fiscal 2023. The following items contributed to the change: • Decreased sales volume within the Global Retail, International Contract & Specialty, and Americas Contract segments of approximately $11 million, $29 million and $77 million, respectively. • Decrease of $20 million related to the closure of the Fully business that occurred in the prior year. Offset in part by: • Price increases, net of incremental discounting, which drove an increase in Net sales of approximately $12 million. • Foreign currency translation increased Net sales by approximately $8 million. Net sales decreased $279 million or 13.0% in the first six months of fiscal 2024 compared to the first six months of fiscal 2023. The following items contributed to the change: • The additional week during the first quarter of the prior year contributed to approximately $77 million of the net sales decrease. • Decrease of $42 million related to the closure of the Fully business that occurred in the prior year. • Decreased sales volume within the Global Retail, International Contract & Specialty, and Americas Contract segments of approximately $37 million, $63 million and $124 million, respectively. Offset in part by: • Price increases, net of incremental discounting, which drove an increase in Net sales of approximately $51 million. • Foreign currency translation increased Net sales by approximately $13 million. Gross Margin Gross margin was 39.2% in the second quarter of fiscal 2024 as compared to 34.5% in the second quarter of fiscal 2023. The following factors summarize the major drivers of the year-over-year change in gross margin percentage: • Price increases, net of incremental discounting, contributed to margin improvement of approximately 90 basis points. 31 • Reduction in costs from commodities, storage and handling costs, freight and product distribution costs, as compared to the same period of the prior year which increased gross margin by approximately 460 basis points. • Savings from the realization of incremental synergies associated with the Knoll acquisition as compared to the same period in the prior year. These factors were offset in part by; • Loss of leverage on lower sales volumes, which negatively impacted margin by approximately 120 basis points. Gross margin was 39.1% in the six months ended December 2, 2023 as compared to 34.5% for the same period in the prior fiscal year. The following factors summarize the major drivers of the year-over-year change in gross margin percentage: • Price increases, net of incremental discounting, contributed to margin improvement of approximately 180 basis points. • Reduction in costs from commodities, storage and handling costs, freight and product distribution costs, as compared to the same period of the prior year which increased gross margin by approximately 370 basis points. • Savings from the realization of incremental synergies associated with the Knoll acquisition as compared to the same period in the prior year. These factors were offset in part by; • Loss of leverage on lower sales volumes and unfavorable channel and product mix, which negatively impacted gross margin by approximately 110 basis points. Operating Expenses The following chart presents graphically the primary drivers of the year-over-year change in Operating expenses for the three and six months ended December 2, 2023. The amounts presented in the graphs are expressed in millions and have been rounded. 32 Operating expenses decreased by $17 million or 5.3% in the second quarter of fiscal 2024 compared to the prior year period. The following factors contributed to the change: • Variable selling and marketing costs decreased by approximately $10 million, due in part to the closure of the Fully business that occurred in the prior year; and • Restructuring charges related to reductions in the Company's workforce as well as acquisition related integration costs contributed to a decrease in Operating expenses as compared to the same period of the prior year of approximately $10 million; and • Other costs, primarily product development costs decreased approximately $5 million, primarily in the Americas Contract and Global Retail segments. These decreases were offset in part by: • Compensation and benefit costs, which increased approximately $8 million, driven by changes in variable-based compensation and incentives; Operating expenses decreased by $21 million or 3.2% in the first six months of fiscal 2024 compared to the first six months of fiscal 2023. The following factors contributed to the change: • The impact of an extra week in the first quarter of fiscal 2023 decreased operating expenses by approximately $10 million in the current period; and • Variable selling and marketing costs decreased by approximately $9 million, due in part to the closure of the Fully business that occurred in the prior year; and • Restructuring charges related to reductions in the Company's workforce contributed to a decrease in Operating expenses of approximately $8 million; and • Product development costs decreased approximately $8 million, primarily in the Americas Contract and Global Retail segments; and • Savings from the realization of incremental synergies associated with the Knoll acquisition as compared to the same period in the prior year. These decreases were offset in part by: • Compensation and benefit costs, which increased approximately $16 million, driven by changes in variable-based compensation and incentives. 33 Other Income/Expense During the three months ended December 2, 2023, net Other expense was $16.1 million, representing a decrease of $1.0 million compared to the same period in the prior year, driven primarily by increased interest income as well as higher foreign currency gains recorded in the current fiscal year, offset in part by increased interest expense as compared to the same period of the prior year. During the six months ended December 2, 2023, net Other expense was $35.3 million, representing an increase of $1.1 million compared to the same period in the prior year. This change is driven primarily by increased interest expense as compared to the same period of the prior year, offset in part by increased interest income in the current year. Income Taxes See Note 10 of the Condensed Consolidated Financial Statements for additional information. Operating Segment Results The business is comprised of various operating segments as defined by generally accepted accounting principles in the United States. These operating segments are determined on the basis of how the Company internally reports and evaluates financial information used to make operating decisions. The segments identified by the Company are Americas Contract, International Contract & Specialty, and Global Retail. Unallocated expenses are reported within the Corporate category. For descriptions of each segment, refer to Note 15 of the Condensed Consolidated Financial Statements. The charts below present the relative mix of Net sales and Operating earnings across each of the Company's segments during the three and six month periods ended December 2, 2023. This is followed by a discussion of the Company's results, by reportable segment. The amounts presented in the charts are in millions and have been rounded. 34 Americas Contract Three Months Ended Six Months Ended (Dollars in millions) December 2, 2023 December 3, 2022 Change December 2, 2023 December 3, 2022 Change Net sales $ 476.1 $ 529.7 $ (53.6) $ 966.5 $ 1,067.1 $ (100.6) Gross margin 161.0 158.7 2.3 335.8 302.9 32.9 Gross margin % 33.8 % 30.0 % 3.8 % 34.7 % 28.4 % 6.3 % Operating earnings 35.1 25.3 9.8 76.5 45.7 30.8 Operating earnings % 7.4 % 4.8 % 2.6 % 7.9 % 4.3 % 3.6 % For the three month comparative period, Net sales decreased 10.1%, or 10.3% (*) on an organic basis, over the prior year period due to: • Decreased sales volumes within the segment of approximately $77 million, driven by the impact of a challenging macro-economic environment; offset by • Price increases, net of incremental discounting of $23 million. For the six month comparative period, Net sales decreased 9.4%, or 6.1% (*) on an organic basis, over the prior year period due to: • Decreased volumes within the segment of approximately $124 million, which was driven by the impact of a challenging macro-economic environment compounded by pandemic-driven pent-up demand last year; and • The impact of an additional week in the same period of the prior year, which reduced sales approximately $39 million; offset by • Price increases, net of incremental discounting of $61 million; and • Favorable foreign currency translation of approximately $1 million. (*) Non-GAAP measurements; see accompanying reconciliations and explanations under the heading "Reconciliation of Non-GAAP Financial Measures." For the three month comparative period, operating earnings increased $9.8 million, or 38.7%, over the prior year period due to: • Increased Gross margin of $2 million due to the increased gross margin percentage of 380 basis points, which more than offset the decrease in net sales discussed above. The increase in gross margin percentage was due primarily to: 35 ◦ The impact of incremental list price increases, net of contract price discounting which provided an approximately 330 basis point improvement over the prior year; and ◦ Decreased commodity costs which provided an improvement of approximately 300 basis points. These increases were offset in part by i ncreased labor costs as well as loss of labor and overhead leverage due to reduced production volumes which had a negative impact on margin of 250 basis points.; as well as ◦ The favorable impact of realization of synergies associated with the Knoll acquisition. • Decreased Operating expenses of $8 million driven primarily by decreased restructuring charges related to reductions in the Company's workforce of approximately $13 million offset in part by an increase in variable compensation costs of approximately $4 million. For the six month comparative period, operating earnings increased $30.8 million, or 67.4%, over the prior year period due to: • Increased Gross margin of $32.9 million due to the increased gross margin percentage of 630 basis points. The increase in gross margin percentage was due primarily to: ◦ The impact of incremental list price increases, net of contract price discounting, that increased gross margin percentage by 430 basis points; and ◦ Decreased commodity and product distribution costs that increased gross margin percentage by 380 basis points. These increases were offset in part by i ncreased labor costs as well as loss of labor and overhead leverage due to reduced production volumes as well as unfavorable product mix which had a negative impact on margin of 180 basis points. Partially offset by; • Increased Operating expenses of $2 million. The following factors contributed to the change: ◦ An increase in variable based compensation of approximately $10 million and increased acquisition related costs costs of $6 million; offset by ◦ A decrease of approximately $5 million due to the additional week in the prior year as well as decreased restructuring charges related to reductions in the Company's workforce of approximately $9 million compared to the prior year. International Contract & Specialty Three Months Ended Six Months Ended (Dollars in millions) December 2, 2023 December 3, 2022 Change December 2, 2023 December 3, 2022 Change Net sales $ 241.2 $ 264.9 $ (23.7) $ 469.5 $ 537.4 $ (67.9) Gross margin 106.0 109.0 (3.0) 202.9 222.4 (19.5) Gross margin % 43.9 % 41.1 % 2.8 % 43.2 % 41.4 % 1.8 % Operating earnings 23.8 28.3 (4.5) 35.2 56.2 (21.0) Operating earnings % 9.9 % 10.7 % (0.8) % 7.5 % 10.5 % (3.0) % For the three month comparative period, Net sales decreased 8.9%, or 10.4% (*) on an organic basis, over the prior year period due to: • Decline in sales volume of approximately $29 million driven mainly by challenging macroeconomic conditions in Europe and China; offset in part by • Favorable foreign currency translation of approximately $4 million; and • Price increases, net of incremental discounting of $1 million. For the six month comparative period, Net sales decreased 12.6%, or 10.7% (*) on an organic basis, over the prior year period due to: • Impact of the extra week in the prior year period, which drove a decrease of $20 million; and • Decreased sales volume of approximately $63 million; offset in part by • Price increases, net of incremental discounting of $8 million; and 36 • Favorable foreign currency translation of approximately $7 million. (*) Non-GAAP measurements; see accompanying reconciliations and explanations under the heading "Reconciliation of Non-GAAP Financial Measures." For the three month comparative period, operating earnings decreased $4.5 million, or 15.9%, over the prior year period due to: • Decreased Gross margin of $3 million due to the decrease in net sales discussed above, which more than offset an increase in gross margin percentage of 280 basis points due primarily to favorable product mix. • Operating expenses increased approximately $2 million which was largely due to an increase in variable compensation costs in the current year. For the six month comparative period, operating earnings decreased $21.0 million, or 37.4%, over the prior year period due to: • Decreased Gross margin of $20 million due to the decrease in sales explained above, which more than offset an increase in gross margin percentage of 180 basis points due primarily to favorable product mix and th e impact of incremental list price increases, net of contract price discounting • Increased Operating expenses of $2 million which was largely due to an increase in variable compensation costs in the current year of $8 million offset by a decrease of $4 million due to the additional week in the prior year and a decrease of $2 million of variable selling costs. Global Retail Three Months Ended Six Months Ended (Dollars in millions) December 2, 2023 December 3, 2022 Change December 2, 2023 December 3, 2022 Change Net sales $ 232.2 $ 272.3 $ (40.1) $ 431.2 $ 541.2 $ (110.0) Gross margin 105.0 99.9 5.1 191.4 214.4 (23.0) Gross margin % 45.2 % 36.7 % 8.5 % 44.4 % 39.6 % 4.8 % Operating earnings 14.7 2.0 12.7 16.9 19.8 (2.9) Operating earnings % 6.3 % 0.7 % 5.6 % 3.9 % 3.7 % 0.2 % For the three month comparative period, Net sales decreased 14.7%, and decreased 9.4% (*) on an organic basis, over the prior year period due to: • Decrease of $20 million related to the closure of the Fully business that occurred in the prior year; and • Incremental discounting, net of price increases which decreased sales by $12 million; and • A decrease in sales volume of approximately $11 million, driven by a slowdown in our wholesale sales internationally due to high rates impacting customer demand and the continued softness in the North American housing market; offset by • Favorable foreign currency translation of approximately $3 million. For the six month comparative period, Net sales decreased 20.3%, and decreased 11.4% (*) on an organic basis, over the prior year period due to: • Decrease of $42 million related to the closure of the Fully business that occurred in the prior year; and • A decrease in sales volume of approximately $37 million, driven by a slowdown in the North American housing market and a continuation of general economic uncertainty; and • The additional week during the first quarter of the prior year contributed to approximately $18 million of the net sales decrease; and • Incremental discounting, net of price increases, which decreased sales by $18 million; offset by • Favorable foreign currency translation of approximately $5 million. (*) Non-GAAP measurements; see accompanying reconciliations and explanations under the heading "Reconciliation of Non-GAAP Financial Measures." For the three month comparative period, Operating earnings increased $13 million or 635.0% over the prior year period due to: 37 • Increased Gross margin of $5 million due to the gross margin percentage increase of 850 basis points attributable to the favorable impact of reduced costs as compared to the prior year associated with product distribution and inventory handling; and • Decreased Operating expenses of $8 million driven primarily by decreased variable selling costs, decreased product development costs, as well as a decrease due to to the closure of the Fully business that occurred in the prior year. For the six month comparative period, Operating earnings decreased $2.9 million, or 14.6%, over the prior year period due to: • Decreased Gross margin of $23 million primarily due to decreased sales explained above, offset by an increase in gross margin percentage of 480 basis points attributable to the favorable impact of reduced costs as compared to the prior year associated with product distribution and inventory handling; and • Decreased Operating expenses of $20 million driven primarily by decreased variable selling and marketing costs of $11 million, a decrease of $4 million due to the additional week in the prior year, decreased product development of $3 million, as well as a decrease due to to the closure of the Fully business that occurred in the prior year. Corporate Corporate unallocated expenses totaled $13.2 million for the second quarter of fiscal 2024, a decrease of $3.7 million from the second quarter of fiscal 2023. The decrease was driven primarily by a reduction in integration costs as compared to the same period of the prior year. Corporate unallocated expenses totaled $27.9 million for the first six months of fiscal 2024, a decrease of $4.3 million from the same period of fiscal 2023. The decrease was driven primarily by a reduction in integration costs as compared to the same period of the prior year. Liquidity and Capital Resources The table below summarizes the net change in Cash and cash equivalents for the six months ended as indicated. (In millions) December 2, 2023 December 3, 2022 Cash provided by (used in): Operating activities $ 213.4 $ (5.3) Investing activities (41.3) (32.0) Financing activities (170.8) 11.6 Effect of exchange rate changes 1.0 (7.1) Net change in Cash and cash equivalents $ 2.3 $ (32.8) Cash Flows - Operating Activities The principal source of our operating cash flow is net earnings. Net cash provided by operating activities for the six months ended December 2, 2023 totaled $213.4 million, as compared to cash used of $5.3 million in the same period of the prior year. The increase in cash inflow is due primarily to higher net income and a reduction in working capital. Our working capital consists primarily of receivables from customers, inventory, prepaid expenses, accounts payable, accrued compensation, and accrued other expenses. The following all affected these account balances: •The timing of collection of our receivables; •Effective inventory management resulting in reduced inventory levels; and •Increased variable compensation in the current quarter. Cash Flows - Investing Activities Cash used in investing activities for the six months ended December 2, 2023 was $41.3 million, as compared to $32.0 million in the same period of the prior year. The increase in cash outflow in the current year, compared to the prior year, was primarily due to the advancement of $13.5 million of cash against the value of company owned life insurance policies received in the six months ended December 3, 2022. This is reflected as cash proceeds from investing activities in the Consolidated Statement of Cash Flows. In the six months ended December 2, 2023 the Company received $3.5 million of proceeds related to the sale of its investment in Maars. 38 At the end of the second quarter of fiscal 2024, there were outstanding commitments for capital purchases of $14.4 million. The Company plans to fund these commitments through a combination of cash on hand and cash flows from operations. The Company expects full-year capital purchases to be between $80 million and $100 million, which will be primarily related to investments in the Company's facilities and equipment. This compares to full-year capital spending of $83.3 million in fiscal 2023. Capital expenditures for the first six months of fiscal 2024 of $39.9 million were comparable to the same period of the prior year. Cash Flows - Financing Activities Cash used in financing activities for the six months ended December 2, 2023 was $170.8 million, as compared to cash provided by financing activities of $11.6 million in the same period of the prior year. The increase in cash used in the current year, compared to the prior year, was primarily due to net payments on the credit agreement of $71.7 million in the current year compared to net borrowings of $67.0 million in the same period of the prior year. During the six months ended December 2, 2023 we repurchased 3.1 million shares at a cost of 60.0 million, compared to share repurchases totaling $14.3 million in the same period of the prior year. Sources of Liquidity The Company has taken actions to safeguard its cash flow and liquidity position in the current environment. The Company is closely managing spending levels, capital investments, and working capital. The Company maintains an open market share repurchase program under our existing share repurchase authorization and may repurchase shares from time to time based on management’s evaluation of market conditions, share price and other factors. At the end of the second quarter of fiscal 2024, the Company had a well-positioned balance sheet and liquidity profile. The Company has access to liquidity through credit facilities as well as cash and cash equivalents. These sources have been summarized below. For additional information, refer to Note 13 to the Condensed Consolidated Financial Statements. (In millions) December 2, 2023 June 3, 2023 Cash and cash equivalents $ 225.8 $ 223.5 Availability under syndicated revolving line of credit 357.3 284.2 Total liquidity $ 583.1 $ 507.7 Of the Cash and cash equivalents noted above at the end of the second quarter of fiscal 2024, the Company had $211.9 million of Cash and cash equivalents held outside the United States. The Company’s syndicated revolving line of credit, which matures in July, 2026, provides the Company with up to $725 million in revolving variable interest borrowing capacity and allows the Company to borrow incremental amounts, at its option, subject to negotiated terms as outlined in the agreement. Outstanding borrowings bear interest at rates based on the prime rate, federal funds rate, SOFR or negotiated terms as outlined in the agreement. As of December 2, 2023, the total debt outstanding related to borrowings under the syndicated revolving line of credit was $355.0 million with available borrowings against this facility of $357.3 million. The Company intends to repatriate $106.5 million of undistributed foreign earnings all of which is held in cash in certain foreign jurisdictions with the remainder of undistributed earnings outside the U.S. recorded in working capital. The Company has recorded a $5.8 million deferred tax liability related to foreign withholding taxes on these future dividends received in the U.S. from foreign subsidiaries. A significant portion of the $106.5 million of undistributed foreign earnings was previously taxed under the U.S. Tax Cut and Jobs Act (TCJA). The Company intends to remain indefinitely reinvested in the remaining undistributed earnings outside the U.S. which is estimated to be approximately $282.2 million on December 2, 2023. The Company believes cash on hand, cash generated from operations, and borrowing capacity will provide adequate liquidity to fund near term and foreseeable future business operations, capital needs, future dividends and share repurchases, subject to financing availability in the marketplace. Contractual Obligations Contractual obligations associated with ongoing business and financing activities will require cash payments in future periods. A table summarizing the amounts and estimated timing of these future cash payments as of June 3, 2023 was provided in the Company's Annual Report on Form 10-K for the year ended June 3, 2023. There have been no material changes in such obligations since that date. 39 Guarantees See Note 12 to the Condensed Consolidated Financial Statements. Variable Interest Entities See Note 17 to the Condensed Consolidated Financial Statements. Contingencies See Note 12 to the Condensed Consolidated Financial Statements. Critical Accounting Policies The Company strives to report financial results clearly and understandably. The Company follows accounting principles generally accepted in the United States in preparing its consolidated financial statements, which require certain estimates and judgments that affect the financial position and results of operations for the Company. The Company continually reviews the accounting policies and financial information disclosures. A summary of the more significant accounting policies that require the use of estimates and judgments in preparing the financial statements is provided in the Company's Annual Report on Form 10-K for the year ended June 3, 2023. New Accounting Standards See Note 2 to the Condensed Consolidated Financial Statements. Cautionary Note Regarding Forward-Looking Statements This report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements relate to future events and anticipated results of operations, business strategies, the anticipated benefits of our acquisition of Knoll, the anticipated impact of the Knoll acquisition on the combined Company’s business and future financial and operating results, the expected amount and timing of synergies from the Knoll acquisition, and other aspects of our operations or operating results. These forward-looking statements generally can be identified by phrases such as “will,” “expects,” “anticipates,” “foresees,” “forecasts,” “estimates” or other words or phrases of similar import. It is uncertain whether any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do, what impact they will have on the results of operations and financial condition of MillerKnoll or the price of MillerKnoll’s stock. These forward-looking statements involve certain risks and uncertainties, many of which are beyond MillerKnoll’s control, that could cause actual results to differ materially from those indicated in such forward-looking statements, including but not limited to: general economic conditions; the impact of any government policies and actions to protect the health and safety of individuals or to maintain the functioning of national or global economies, and the Company's response to any such policies and actions; the impact of public health crises, such as pandemics and epidemics; risks related to the additional debt incurred in connection with the Knoll acquisition; MillerKnoll’s ability to comply with its debt covenants and obligations; the risk that the anticipated benefits of the Knoll acquisition will be more costly to realize than expected; the effect of the announcement of the Knoll acquisition on the ability of MillerKnoll to retain and hire key personnel and maintain relationships with customers, suppliers and others with whom MillerKnoll does business, or on MillerKnoll’s operating results and business generally; the ability to successfully integrate Knoll’s operations; the ability of MillerKnoll to implement its plans, forecasts and other expectations with respect to MillerKnoll’s business after the completion of the Knoll acquisition and realize expected synergies; business disruption following the Knoll acquisition; the availability and pricing of raw materials; the financial strength of our dealers and the financial strength of our customers; the success of newly-introduced products; the pace and level of government procurement; regional and global geopolitical events; foreign currency exchange fluctuations; and the outcome of pending litigation or governmental audits or investigations. For additional information about other factors that could cause actual results to differ materially from those described in the forward-looking statements, please refer to MillerKnoll’s periodic reports and other filings with the SEC, including the risk factors identified in our Annual Report on Form 10-K for the year ended June 3, 2023 . The forward-looking statements included in this report are made only as of the date hereof. MillerKnoll does not undertake any obligation to update any forward-looking statements to reflect subsequent events or circumstances, except as required by law.