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 1, 2024. 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 and the Company’s eCommerce platforms. The following is a summary of results for the three months ended November 30, 2024: • Net sales were $970.4 million and orders were $921.9 million, representing an increase of 2.2% and decrease of 2.3%, respectively, when compared to the same quarter of the prior year. This increase in sales for the current quarter marked the first period of year-over-year sales growth in two years. On an organic basis, which excludes the impact of foreign currency translation and the impact of the closure of the HAY eCommerce channel in North America, Net sales were $968.1 million (*) and orders were $921.5 million (*) , representing an organic increase of 2.4% (*) and decrease of 1.9% (*) , respectively, when compared to the same quarter of the prior year. • Gross margin in the second quarter was 38.8%, a decrease of 40 basis points when compared to the same quarter of the prior year, related primarily to unfavorable channel and product mix. • Operating expenses increased by $2.9 million or 0.9% as compared to the same quarter of the prior year. The increase was driven primarily by increased marketing spend, higher variable expense and higher compensation and benefit costs. • The effective tax rate was 21.8% compared to 21.4% for the same quarter of the prior year. The change as compared to the prior year resulted primarily by a change in the mix of earnings within various tax jurisdictions. • Diluted earnings per share was $0.49 as compared to diluted earnings per share of $0.45 in the prior year. Adjusted diluted earnings per share was $0.55 (*) , a 6.8% (*) decrease 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: • MillerKnoll finished the second quarter of fiscal year 2025 in line with our expectations. Although most of our market segments continue to experience broad-based macroeconomic pressures, several areas of our business are showing signs of growth and the business has maintained the gross margin improvement that occurred in fiscal year 2024. • The Americas Contract segment in the second quarter reported Net sales totaling $504.2 million, up 5.9% compared to the prior year period on a reported basis and up 6.2% (*) organically. Americas Contract had new orders of $456.8 million, which was an increase of 4.4% from the prior year and and increase of 4.9% (*) on an organic basis. This quarter marked our third consecutive period of order growth in the Americas Contract segment. • The International Contract & Specialty segment delivered Net sales in the second quarter of $246.3 million, an increase of 2.1% from the year-ago period on a reported basis and an increase of 1.1% (*) organically. New orders in this segment totaled $218.7 million, representing a year-over-year decrease of 6.5% on a reported basis and a decrease of 7.2% (*) organically. 23 • Net sales in the second quarter for the Global Retail segment totaled $219.9 million, a decrease of 5.3% over the same quarter last year on a reported basis and an decrease of 4.0% (*) organically. Orders in the quarter totaled $246.4 million, down 9.6% compared to the same period last year on a reported basis and down 8.4% (*) organically. Both sales and orders were impacted by a shift in timing of the cyber week holiday promotion period, which fell into both the second and third quarters of fiscal year 2025 and fell entirely within the second quarter last fiscal year. The timing of this cyber week holiday promotion period shifted approximately $12 million in Net sales, and $27 million in orders from our fiscal second quarter into the third quarter. (*) 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 May 31, 2025 ("fiscal 2025") and the fiscal year ended June 1, 2024 ("fiscal 2024") both contain 52 weeks. The remaining sections within Item 2 include additional analysis of the three and six months ended November 30, 2024, 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, Knoll pension plan termination charges 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 and the impact of the closure of the HAY eCommerce channel in North America. 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, asset impairment charges associated with lease and operations facility consolidation activity, and expenses related to synergy realization efforts and reorganization initiatives. • Restructuring charges: Includes costs associated with actions involving targeted workforce reductions. • Knoll pension plan termination charges: Includes expenses incurred associated with the termination of the Knoll pension plan. 24 • 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. The following tables reconcile Net sales to Net sales, organic for the periods ended as indicated below: Three Months Ended November 30, 2024 Americas Contract International Contract & Specialty Global Retail Total Net sales, as reported $ 504.2 $ 246.3 $ 219.9 $ 970.4 % change from PY 5.9 % 2.1 % (5.3) % 2.2 % Adjustments Currency translation effects (1) 1.3 (2.4) (1.2) (2.3) Net sales, organic $ 505.5 $ 243.9 $ 218.7 $ 968.1 % change from PY 6.2 % 1.1 % (4.0) % 2.4 % 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 Adjustments HAY eCommerce — — (4.5) (4.5) Net sales, organic $ 476.1 $ 241.2 $ 227.7 $ 945.0 (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. 25 Six Months Ended November 30, 2024 Americas Contract International Contract & Specialty Global Retail Total Net sales, as reported $ 958.8 $ 459.8 $ 413.3 $ 1,831.9 % change from PY (0.8) % (2.1) % (4.2) % (1.9) % Adjustments Currency translation effects (1) 2.7 (1.9) (0.3) 0.5 Net sales, organic $ 961.5 $ 457.9 $ 413.0 $ 1,832.4 % change from PY (0.5) % (2.5) % (2.0) % (1.3) % 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 Adjustments HAY eCommerce — — (9.9) (9.9) Net sales, organic $ 966.5 $ 469.5 $ 421.3 $ 1,857.3 (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 26 The following tables reconcile orders as reported to organic orders for the periods ended as indicated below: Three Months Ended November 30, 2024 Americas Contract International Contract & Specialty Global Retail Total Orders, as reported $ 456.8 $ 218.7 $ 246.4 $ 921.9 % change from PY 4.4 % (6.5) % (9.6) % (2.3) % Adjustments Currency translation effects (1) 2.0 (1.7) (0.7) (0.4) Orders, organic $ 458.8 $ 217.0 $ 245.7 $ 921.5 % change from PY 4.9 % (7.2) % (8.4) % (1.9) % 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 Adjustments HAY eCommerce — — (4.5) (4.5) Orders, organic $ 437.4 $ 233.9 $ 268.2 $ 939.5 (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. 27 Six Months Ended November 30, 2024 Americas Contract International Contract & Specialty Global Retail Total Orders, as reported $ 969.5 $ 452.8 $ 435.5 $ 1,857.8 % change from PY 4.8 % (1.9) % (7.6) % — % Adjustments Currency translation effects (1) 4.4 (0.8) 0.5 4.1 Orders, organic $ 973.9 $ 452.0 $ 436.0 $ 1,861.9 % change from PY 5.3 % (2.1) % (5.5) % 0.7 % 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 Adjustments HAY eCommerce — — (9.6) (9.6) Orders, organic $ 924.7 $ 461.8 $ 461.6 $ 1,848.1 (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. 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 November 30, 2024 December 2, 2023 November 30, 2024 December 2, 2023 Earnings per share - diluted $ 0.49 $ 0.45 $ 0.47 $ 0.67 Add: Amortization of Knoll purchased intangibles 0.08 0.08 0.16 0.16 Add: Integration charges — 0.09 0.40 0.16 Add: Restructuring charges — 0.02 — 0.08 Add: Knoll pension plan termination charges — — 0.01 — Tax impact on adjustments (0.02) (0.05) (0.14) (0.11) Adjusted earnings per share - diluted $ 0.55 $ 0.59 $ 0.90 $ 0.96 Weighted average shares outstanding (used for calculating adjusted earnings per share) – diluted 70,032,959 74,240,293 70,768,547 75,077,712 28 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) November 30, 2024 December 2, 2023 % Change November 30, 2024 December 2, 2023 % Change Net sales $ 970.4 $ 949.5 2.2 % $ 1,831.9 $ 1,867.2 (1.9) % Cost of sales 593.4 577.5 2.8 % 1,118.6 1,137.1 (1.6) % Gross margin 377.0 372.0 1.3 % 713.3 730.1 (2.3) % Operating expenses 314.5 311.6 0.9 % 635.6 629.4 1.0 % Operating earnings 62.5 60.4 3.5 % 77.7 100.7 (22.8) % Other expenses, net 17.6 16.1 9.3 % 34.5 35.3 (2.3) % Earnings before income taxes and equity income 44.9 44.3 1.4 % 43.2 65.4 (33.9) % Income tax expense 9.8 9.5 3.2 % 8.7 14.6 (40.4) % Equity income (loss) from nonconsolidated affiliates, net of tax 0.1 (0.4) (125.0) % 0.2 (0.3) (166.7) % Net earnings 35.2 34.4 2.3 % 34.7 50.5 (31.3) % Net earnings attributable to redeemable noncontrolling interests 1.1 0.9 22.2 % 1.8 0.3 500.0 % Net earnings attributable to MillerKnoll, Inc. $ 34.1 $ 33.5 1.8 % $ 32.9 $ 50.2 (34.5) % Earnings per share - basic $ 0.49 $ 0.45 8.9 % $ 0.47 $ 0.67 (29.9) % Orders $ 921.9 $ 944.0 (2.3) % $ 1,857.8 $ 1,857.7 — % Backlog $ 709.4 $ 688.5 3.0 % 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 November 30, 2024 December 2, 2023 November 30, 2024 December 2, 2023 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 61.2 % 60.8 % 61.1 % 60.9 % Gross margin 38.8 % 39.2 % 38.9 % 39.1 % Operating expenses 32.4 % 32.8 % 34.7 % 33.7 % Operating earnings 6.4 % 6.4 % 4.2 % 5.4 % Other expenses, net 1.8 % 1.7 % 1.9 % 1.9 % Earnings before income taxes and equity income 4.6 % 4.7 % 2.4 % 3.5 % Income tax expense 1.0 % 1.0 % 0.5 % 0.8 % Equity income (loss) from nonconsolidated affiliates, net of tax — % — % — % — % Net earnings 3.6 % 3.6 % 1.9 % 2.7 % Net earnings attributable to redeemable noncontrolling interests 0.1 % 0.1 % 0.1 % — % Net earnings attributable to MillerKnoll, Inc. 3.5 % 3.5 % 1.8 % 2.7 % 29 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 November 30, 2024. The amounts presented in the graph are expressed in millions and have been rounded. Net sales increased $20.9 million or 2.2% in the second quarter of fiscal 2025 compared to the second quarter of fiscal 2024. The following items contributed to the change: • Increased sales volume within the Americas Contract and International Contract & Specialty segments of approximately $26 million and $6 million, respectively; and • Price increases, net of incremental discounting, which drove an increase in Net sales of approximately $4 million; and • Foreign currency translation increased Net sales by approximately $2 million. Offset in part by: 30 • Decreased sales volume within the Global Retail segment of approximately $13 million, driven primarily by a shift in the timing of the holiday cyber promotional period, which fell across both the second and third quarters of the current year. • Decrease of $5 million related to the closure of the HAY eCommerce channel in North America that occurred in the prior year. Net sales decreased $35.3 million or 1.9% in the first six months of fiscal 2025 compared to the first six months of fiscal 2024. The following items contributed to the change: • Decreased sales volume within the Americas Contract, Global Retail and International Contract & Specialty segments of approximately $24 million, $9 million and $4 million, respectively. • Decrease of $10 million related to the closure of the HAY eCommerce channel in North America that occurred in the prior year. • Foreign currency translation decreased Net sales by approximately $1 million. Offset in part by: • Price increases, net of incremental discounting, which drove an increase in Net sales of approximately $13 million. Gross Margin Gross margin was 38.8% in the second quarter of fiscal 2025 as compared to 39.2% in the second quarter of fiscal 2024. The following factors summarize the major drivers of the year-over-year change in gross margin percentage: • Unfavorable product mix negatively impacted margin by approximately 140 basis points. Offset in part by: • Reduced freight and product distribution costs, as compared to the same period of the prior year, which increased gross margin by approximately 40 basis points. • Leverage on higher sales volumes and increased production levels positively impacted margin by approximately 40 basis points. • Price increases, net of incremental discounting, contributed to margin improvement of approximately 20 basis points. Gross margin was 38.9% in the six months ended November 30, 2024, as compared to 39.1% 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: • Loss of leverage on lower sales volumes negatively impacted margin by approximately 40 basis points. • Unfavorable channel and product mix negatively impacted margin by approximately 40 basis points. These factors were offset in part by: • Price increases, net of incremental discounting, contributed to margin improvement of approximately 50 basis points. • Reduced freight and product distribution costs, as compared to the same period of the prior year which increased gross margin by approximately 10 basis points. 31 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 November 30, 2024. The amounts presented in the graphs are expressed in millions and have been rounded. Operating expenses increased by $2.9 million or 0.9% in the second quarter of fiscal 2025 compared to the prior year period. The following factors contributed to the change: • Variable selling and marketing costs increased by approximately $6 million driven by increased net sales as compared to the prior year period ; • Compensation and benefit costs, which increased approximately $4 million; • Foreign currency translation increased Operating expenses by approximately $2 million. Offset in part by: 32 • Acquisition related integration charges contributed a decrease in Operating expenses as compared to the same period of the prior year of approximately $7 million; and • Restructuring charges related to reductions in the Company's workforce in the prior year of approximately $2 million that did not occur in the current year. Operating expenses increased by $6.2 million or 1.0% in the first six months of fiscal 2025 compared to the first six months of fiscal 2024. The following factors contributed to the change: • Acquisition related integration charges contributed an increase in Operating expenses as compared to the same period of the prior year of approximately $18 million; • Foreign currency translation increased Operating expenses by approximately $2 million; • Compensation and benefit costs increased approximately $1 million. These increases were offset in part by: • Variable selling and marketing costs, which decreased by approximately $7 million driven by variability on lower net sales and the impact of cost synergies achieved through the acquisition of Knoll; and • Restructuring charges related to reductions in the Company's workforce in the prior year of approximately $7 million that did not occur in the current year. Other Income/Expense During the three months ended November 30, 2024, net Other expense was $17.6 million, representing an increase of $1.5 million compared to the same period in the prior year, driven primarily by increased foreign currency losses. During the six months ended November 30, 2024, net Other expense was $34.5 million, representing a decrease of $0.8 million compared to the same period in the prior year. This change is driven primarily by increased interest income in the current year offset in part by increased interest expense as compared to the same period of the prior year. Income Taxes See Note 9 of the Condensed Consolidated Financial Statements for additional information. 33 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 14 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 November 30, 2024. 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) November 30, 2024 December 2, 2023 Change November 30, 2024 December 2, 2023 Change Net sales $ 504.2 $ 476.1 $ 28.1 $ 958.8 $ 966.5 $ (7.7) Gross margin 171.5 161.0 10.5 325.6 335.8 (10.2) Gross margin % 34.0 % 33.8 % 0.2 % 34.0 % 34.7 % (0.7) % Operating earnings 47.5 35.1 12.4 64.6 76.5 (11.9) Operating earnings % 9.4 % 7.4 % 2.0 % 6.7 % 7.9 % (1.2) % For the three month comparative period, Net sales increased 5.9%, or 6.2% (*) on an organic basis, over the prior year period due to: • Increased sales volumes within the segment of approximately $26 million; and • Price increases, net of incremental discounting of $4 million; offset in part by • Unfavorable foreign currency translation of approximately $1 million. For the six month comparative period, Net sales decreased 0.8%, or 0.5% (*) on an organic basis, over the prior year period due to: • Decreased volumes within the segment of approximately $24 million; and • Unfavorable foreign currency translation of approximately $3 million; offset in part by • Price increases, net of incremental discounting of $19 million; and (*) 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 $12.4 million, or 35.3%, over the prior year period due to: • Increased Gross margin of $10.5 million due to the increase in net sales discussed above and an increase in gross margin percentage of 20 basis points. The increase in gross margin percentage was due primarily to: ◦ The impact of incremental list price increases, net of contract price discounting which provided an approximately 50 basis point improvement over the prior year; as well as ◦ Leverage of fixed costs on increased production volumes w hich had a positive impact on margin of approximately 70 basis points. These increases were offset by: ◦ Unfavorable product mix which had a negative impact on margin of approximately 100 basis points. • Decreased Operating expenses of $1.9 million driven primarily by: ◦ Decrease in acquisition related integration costs of approximately $6 million in the current period. Offset in part by: ◦ Increase of $4 million related to costs associated with distribution channel and technology initiatives. For the six month comparative period, operating earnings decreased $11.9 million, or 15.6%, over the prior year period due to: • Decreased Gross margin of $10.2 million due to the decrease in sales discussed above and a decrease in gross margin percentage of 70 basis points. The decrease in gross margin percentage was due primarily to: ◦ Loss of leverage of fixed costs due to reduced production volumes as well as unfavorable product mix which had a negative impact on margin of approximately 170 basis points; and ◦ Increased commodity and product distribution costs which had a negative impact on margin of 30 basis points. These changes were offset in part by: ◦ The impact of incremental list price increases, net of contract price discounting, that increased gross margin percentage by 130 basis points. 35 • Increased Operating expenses of $2 million. The following factors contributed to the change: ◦ Increase in acquisition related integration costs of approximately $13 million in the current period. Offset in part by: ◦ Decreased variable selling and marketing costs of $7 million; ◦ A decrease of approximately $4 million in restructuring charges related to reductions in the Company's workforce taken in the prior year; ◦ A decrease of approximately $4 million in compensation and benefit costs. International Contract & Specialty Three Months Ended Six Months Ended (Dollars in millions) November 30, 2024 December 2, 2023 Change November 30, 2024 December 2, 2023 Change Net sales $ 246.3 $ 241.2 $ 5.1 $ 459.8 $ 469.5 $ (9.7) Gross margin 106.8 106.0 0.8 201.9 202.9 (1.0) Gross margin % 43.4 % 43.9 % (0.5) % 43.9 % 43.2 % 0.7 % Operating earnings 23.8 23.8 — 33.1 35.2 (2.1) Operating earnings % 9.7 % 9.9 % (0.2) % 7.2 % 7.5 % (0.3) % For the three month comparative period, Net sales increased 2.1%, or 1.1% (*) on an organic basis, over the prior year period due to: • Increase in sales volume of approximately $6 million, which was driven by sales growth within the APMEA and Europe regions; and • Favorable foreign currency translation of approximately $2 million; offset in part by • Incremental discounting, net of price increases, which negatively impacted sales approximately $3 million. For the six month comparative period, Net sales decreased 2.1%, or 2.5% (*) on an organic basis, over the prior year period due to: • Incremental discounting, net of price increases, which negatively impacted sales by approximately $7 million; and • Decreased sales volume of approximately $4 million, driven by lower sales volume within the textiles and Holly Hunt businesses, which more than offset volume increases in Europe and APMEA; offset in part by • Favorable foreign currency translation of approximately $2 million. (*) Non-GAAP measurements; see accompanying reconciliations and explanations under the heading "Reconciliation of Non-GAAP Financial Measures." Operating earnings were $23.8 million in both the second quarter of fiscal 2025 and the second quarter of fiscal 2024. Although Operating earnings were flat to the prior year, summarized below are factors that most significantly impacted Operating earnings during the quarter: • Increased Gross margin of $0.8 million due to the increase in net sales discussed above, offset by a decease in gross margin percentage of 50 basis points due primarily to incremental discounting, net of price increases. • Increased Operating expenses of $0.8 million. The following factors contributed to the change: ◦ Increase in variable selling and marketing costs of $3 million. This increase was offset in part by: ◦ Decreased variable compensation and benefit costs and benefits from cost synergies achieved through the acquisition of Knoll . For the six month comparative period, operating earnings decreased $2.1 million, or 6.0%, over the prior year period due to: • Decreased Gross margin of $1 million due to the decrease in sales explained above, offset in part by an increase in gross margin percentage of 70 basis points due primarily to favorable product and business mix. 36 • Increased Operating expenses of $1 million which was largely due to an increase in integration related charges in the current year of $4 million. This increase was offset in part by a decrease of $3 million in variable compensation and benefit costs and cost synergies achieved through the acquisition of Knoll. Global Retail Three Months Ended Six Months Ended (Dollars in millions) November 30, 2024 December 2, 2023 Change November 30, 2024 December 2, 2023 Change Net sales $ 219.9 $ 232.2 $ (12.3) $ 413.3 $ 431.2 $ (17.9) Gross margin 98.7 105.0 (6.3) 185.8 191.4 (5.6) Gross margin % 44.9 % 45.2 % (0.3) % 45.0 % 44.4 % 0.6 % Operating earnings 8.7 14.7 (6.0) 13.2 16.9 (3.7) Operating earnings % 4.0 % 6.3 % (2.3) % 3.2 % 3.9 % (0.7) % For the three month comparative period, Net sales decreased 5.3%, and 4.0% (*) on an organic basis, over the prior year period due to: • A decrease in sales volume of approximately $13 million, driven primarily by a shift in timing of the cyber week holiday promotional period. In the current year, the promotional period was split between the second and third quarters; in the prior year the entire promotional period was included in the second quarter; and • Decrease of approximately $5 million related to the closure of the HAY eCommerce channel in North America that occurred in the prior year; offset in part by: • Price increases, net of incremental discounting which increased sales by approximately $4 million; and • Favorable foreign currency translation of approximately $1 million. For the six month comparative period, Net sales decreased 4.2%, and 2.0% (*) on an organic basis, over the prior year period due to: • Decrease of approximately $10 million related to the closure of the HAY eCommerce channel in North America that occurred in the prior year; and • A decrease in sales volume of approximately $9 million, driven in part by the shift in timing for how the cyber week promotional period fell within our fiscal quarters ; offset in part by • Price increases, net of incremental discounting, which increased sales by $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 decreased $6.0 million or 40.8% over the prior year period due to: • Decreased Gross margin of $6.3 million due to decrease in net sales discussed above and the gross margin percentage decrease of 30 basis points which was attributable to: ◦ The impact of increased inventory costs as compared to the prior year and loss of leverage of fixed costs negatively impacted margin by 170 basis points. This decrease was offset in part by benefits realized from price increases, net of incremental discounting which positively impacted margin by 100 basis points as well as reduced product distribution costs which positively impacted margin by approximately 40 basis points. • Decreased Operating expenses of $0.3 million primarily related to lower acquisition related integration costs and restructuring costs in the current period as compared to the prior year. These increases were offset in part by increased variable selling costs in the current period. For the six month comparative period, Operating earnings decreased $3.7 million, or 21.9% over the prior year period due to: • Decreased Gross margin of $5.6 million due to the decrease in net sales discussed above, offset by an increase in gross margin percentage of 60 basis points. The increase in gross margin percentage was due primarily to: ◦ Decreased product distribution costs and favorable product mix which had a favorable impact on gross margin percentage of 180 basis points; and 37 ◦ The impact of incremental list price increases, net of discounting, that increased gross margin percentage by 30 basis points. These increases were offset in part by: ◦ The impact of increased inventory costs as compared to the prior year which negatively impacted margin by 100 basis points. ◦ Loss of leverage on fixed costs attributable to lower sales volumes as compared to the prior year which had an unfavorable impact on gross margin percentage of 50 basis points. • Decreased Operating expenses of $2 million driven by restructuring charges related to reductions in the Company's workforce in the prior year that did not occur in the current year and benefit from the realization of cost synergies achieved through the acquisition of Knoll. Corporate Corporate unallocated expenses totaled $17.5 million for the second quarter of fiscal 2025, an increase of $4.3 million from the second quarter of fiscal 2024 related primarily to higher stock based compensation expense. Corporate unallocated expenses totaled $33.2 million for the first six months of fiscal 2025, an increase of $5.3 million from the same period of fiscal 2024 related primarily to higher stock based compensation expense. 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) November 30, 2024 December 2, 2023 Cash provided by (used in): Operating activities $ 76.4 $ 213.4 Investing activities (44.8) (41.3) Financing activities (33.9) (170.8) Effect of exchange rate changes (7.0) 1.0 Net change in Cash and cash equivalents $ (9.3) $ 2.3 Cash Flows - Operating Activities Net cash provided by operating activities for the six months ended November 30, 2024, totaled $76.4 million compared to $213.4 million in the same period of the prior year. The decrease in cash inflow is due primarily to lower net income and changes in working capital. Our working capital consists primarily of receivables from customers, inventory, prepaid expenses, accounts payable, accrued compensation, and accrued other expenses. Working capital changes were primarily affected by payment of variable compensation in the six months ended November 30, 2024, as well as timing of collection of our receivables. Cash Flows - Investing Activities Cash used in investing activities for the six months ended November 30, 2024, was $44.8 million, as compared to $41.3 million in the same period of the prior year. The change in cash outflow in the current year, compared to the prior year, was primarily due to increased capital expenditures in the current year offset in part by: • A decrease in the total volume of notes receivable entered into with certain independently owned dealers in the current quarter as compared to the same period of the prior year; and • 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. At the end of the second quarter of fiscal 2025, there were outstanding commitments for capital purchases of $17.1 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 $100 million and $125 million, which will be primarily related to investments in the Company's facilities and equipment. This compares to full-year capital spending of $78.4 million in fiscal 38 2024. Capital expenditures for the first six months of fiscal 2025 were $44.9 million compared to $39.9 million for the six months ended December 2, 2023. Cash Flows - Financing Activities Cash used in financing activities for the six months ended November 30, 2024, was $33.9 million, as compared to $170.8 million in the same period of the prior year. The decrease in cash used in the current quarter, compared to the prior year, was primarily due to: • Net borrowings on the credit agreement of $73.1 million in the current year compared to net payments of $71.7 million in the same period of the prior year. This was offset in part by: • The Company repurchased 2,500,379 shares at a cost of $66.9 million in the current year as compared to 3,060,686 share repurchases totaling $60.0 million in the same period of the prior year. • Increased payments on our term loans in the current period as compared to the same period of the prior year of $5.0 million. Sources of Liquidity 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 2025, 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 12 to the Condensed Consolidated Financial Statements. (In millions) November 30, 2024 June 1, 2024 Cash and cash equivalents $ 221.1 $ 230.4 Availability under syndicated revolving line of credit 249.3 322.3 Total liquidity $ 470.4 $ 552.7 Of the Cash and cash equivalents noted above at the end of the second quarter of fiscal 2025, the Company had $207.8 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 November 30, 2024, the total debt outstanding related to borrowings under the syndicated revolving line of credit was $463.1 million with available borrowings on this facility of $249.3 million. The Company intends to repatriate $104.3 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 $3.7 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 $104.3 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 $347.5 million on November 30, 2024. 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, upcoming debt maturities, 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 1, 2024, was provided in the Company's Annual Report on Form 10-K for the year ended June 1, 2024. There have been no material changes in such obligations since that date. Guarantees See Note 11 to the Condensed Consolidated Financial Statements. 39 Variable Interest Entities See Note 16 to the Condensed Consolidated Financial Statements. Contingencies See Note 11 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 1, 2024. 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 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; 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 most recent Quarterly Reports on Form 10-Q and Annual Report on Form 10-K for the year ended June 1, 2024 . 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.