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, owned retail studios, the Company’s eCommerce platforms, direct mail catalogs, as well as direct customer sales and independent retailers.
On July 19, 2021 the Company acquired Knoll, Inc. ("Knoll") (See Note 5. "Acquisitions"). Knoll is a leading global manufacturer of commercial and residential furniture, accessories, lighting, and coverings. The Company has included the financial results of Knoll in the condensed consolidated financial statements from the date of acquisition. On October 11, 2021, our shareholders approved an amendment to our Restated Articles of Incorporation to change our corporate name from Herman Miller, Inc. to MillerKnoll, Inc. On November 1, 2021, the change in corporate name and ticker symbol to MLKN became effective.
MillerKnoll is a collective of dynamic brands that comes together to design the world we live in. A global leader in design, MillerKnoll includes Herman Miller® and Knoll®, as well as Colebrook Bosson Saunders®, DatesWeiser®, Design Within Reach®, Edelman® Leather, Fully®, Geiger®, HAY®, Holly Hunt®, KnollTextiles®, Maars® Living Walls, Maharam®, Muuto®, naughtone®, and Spinneybeck®|FilzFelt®. Combined, 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. (“the Company”) 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," "Herman Miller," "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 February 26, 2022. Operating results for the three and nine months ended February 26, 2022 are not necessarily indicative of the results that may be expected for the year ending May 28, 2022 ("fiscal 2022"). It is suggested that these Condensed Consolidated Financial Statements be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended May 29, 2021 ("fiscal 2021"). All intercompany transactions have been eliminated in the Condensed Consolidated Financial Statements. The financial statements of equity method investments are not consolidated.
Immaterial Correction of Error
The Company’s previously issued financial statements have been revised to reclassify certain lease liabilities that were inappropriately presented within the Consolidated Balance Sheet as of May 29, 2021. As a result, $24.2 million was reclassified from Short-term lease liability to Lease liabilities on the Consolidated Balance Sheet as of May 29, 2021. The error had no impact on the Company's Consolidated Statements of Comprehensive Income (Loss), Cash Flows or Stockholders’ Equity. Management has evaluated the error and has determined, based on quantitative and qualitative factors, that it is not material to the May 29, 2021 Consolidated Balance Sheet.
Segment Reorganization
Effective as of May 30, 2021, the beginning of fiscal year 2022, 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. Below is a
description of each reportable segment. Intersegment sales are eliminated within each segment, with the exception of sales to and from the Knoll segment, which are presented as intersegment eliminations.
•Global Retail ("Retail") – reflects the legacy North America Retail segment and now includes International Retail
•Americas Contract ("Americas") – reflects the legacy Herman Miller North America Contract segment combined with Latin America and Design Within Reach Contract
•International Contract ("International") – reflects global Contract activity outside the Americas, excluding the international activity of Knoll
•Knoll – the Knoll segment includes the global operations associated with the design, manufacture, and sale of furniture products within the Knoll constellation of brands. The acquired Knoll business will initially be reflected as a stand-alone segment.
2. Recently Issued Accounting Standards
Recently Adopted Accounting Standards
On May 30, 2021, the Company adopted ASU No. 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans." This update eliminates, adds and clarifies certain disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans. The eliminated disclosures include (a) the amounts in accumulated other comprehensive income expected to be recognized in net periodic benefit costs over the next fiscal year and (b) the effects of a one percentage point change in assumed health care cost trend rates on the net periodic benefit costs and the benefit obligation for post-retirement health care benefits. Additional disclosures include descriptions of significant gains and losses affecting the benefit obligation for the period. The adoption of this guidance did not have a material effect on our consolidated financial statements and additional disclosures will be made in our annual report.
On May 30, 2021, the Company adopted ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." This update removes certain exceptions for recognizing deferred taxes for investments, performing intra-period allocation and calculating income taxes in interim periods. The update also adds guidance to reduce complexity in certain areas. The adoption of this guidance did not have a material impact on the Company's financial statements.
Recently Issued Accounting Standards Not Yet Adopted
The Company is currently evaluating the impact of adopting the following relevant standards issued by the FASB:
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| Standard | | | | Description | | Effective Date |
| 2021-10 | | Government Assistance | | This update requires disclosures to increase the transparency of transactions with governments accounted for by applying a grant or contribution accounting model by analogy, including the (1) types of transactions, (2) the accounting for those transactions, and (3) the effect of those transactions on an entity's financial statements. Early adoption is permitted. The Company is evaluating the effect of adopting this new accounting guidance. | | May 29, 2022 |
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We have assessed all other 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.
MillerKnoll, Inc. and Subsidiaries 9
3. Revenue from Contracts with Customers
Disaggregated Revenue
Revenue disaggregated by contract type is provided in the table below:
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| Three Months Ended | | Nine Months Ended |
| (In millions) | February 26, 2022 | | February 27, 2021 | | February 26, 2022 | | February 27, 2021 |
| Net Sales: | | | | | | | |
| Single performance obligation | | | | | | | |
| Product revenue | $ | 953.3 | | | $ | 531.2 | | | $ | 2,632.0 | | | $ | 1,618.8 | |
| Multiple performance obligations | | | | | | | |
| Product revenue | 69.9 | | | 54.9 | | | 197.9 | | | 210.5 | |
| Service revenue | 2.5 | | | 2.0 | | | 7.3 | | | 8.1 | |
| Other | 3.8 | | | 2.4 | | | 8.3 | | | 6.2 | |
| Total | $ | 1,029.5 | | | $ | 590.5 | | | $ | 2,845.5 | | | $ | 1,843.6 | |
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.
Revenue disaggregated by product type and reportable segment is provided in the table below:
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| Three Months Ended | | Nine Months Ended |
| (In millions) | February 26, 2022 | | February 27, 2021 | | February 26, 2022 | | February 27, 2021 |
| Americas Contract: | | | | | | | |
| Workplace | $ | 204.2 | | | $ | 163.9 | | | $ | 578.0 | | | $ | 580.7 | |
| Performance Seating | 90.3 | | | 71.7 | | | 271.9 | | | 241.0 | |
| Lifestyle | 37.9 | | | 27.1 | | | 105.1 | | | 88.6 | |
| Other | 32.7 | | | 28.0 | | | 97.0 | | | 97.7 | |
| Total Americas Contract | $ | 365.1 | | | $ | 290.7 | | | $ | 1,052.0 | | | $ | 1,008.0 | |
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| International Contract: | | | | | | | |
| Workplace | $ | 30.1 | | | $ | 23.3 | | | $ | 91.2 | | | $ | 82.9 | |
| Performance Seating | 61.0 | | | 51.4 | | | 167.8 | | | 146.3 | |
| Lifestyle | 27.2 | | | 20.0 | | | 78.6 | | | 59.3 | |
| Other | 5.1 | | | 3.3 | | | 9.8 | | | 5.0 | |
| Total International Contract | $ | 123.4 | | | $ | 98.0 | | | $ | 347.4 | | | $ | 293.5 | |
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| Global Retail: | | | | | | | |
| Workplace | $ | 3.2 | | | $ | 2.7 | | | $ | 9.6 | | | $ | 7.6 | |
| Performance Seating | 63.4 | | | 75.2 | | | 184.5 | | | 196.3 | |
| Lifestyle | 145.4 | | | 123.5 | | | 439.6 | | | 337.2 | |
| Other | 0.8 | | | 0.4 | | | 1.7 | | | 1.0 | |
| Total Global Retail | $ | 212.8 | | | $ | 201.8 | | | $ | 635.4 | | | $ | 542.1 | |
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| Knoll: | | | | | | | |
| Workplace | $ | 155.0 | | | $ | — | | | $ | 388.0 | | | $ | — | |
| Performance Seating | 29.1 | | | — | | | 66.8 | | | — | |
| Lifestyle | 125.7 | | | — | | | 310.6 | | | — | |
| Other | 27.1 | | | — | | | 64.1 | | | — | |
| Total Knoll | $ | 336.9 | | | $ | — | | | $ | 829.5 | | | $ | — | |
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| Intersegment sales elimination | $ | (8.7) | | | $ | — | | | $ | (18.8) | | | $ | — | |
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| Total | $ | 1,029.5 | | | $ | 590.5 | | | $ | 2,845.5 | | | $ | 1,843.6 | |
Refer to Note 16 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 February 26, 2022, the Company recognized Net sales of $14.2 million and $85.5 million, respectively, related to customer deposits that were included in the balance sheet as of May 29, 2021. The Company assumed a contract liability of $55.5 million related to the acquisition of Knoll, Inc on July 19, 2021.
MillerKnoll, Inc. and Subsidiaries 11
4. Leases
The components of lease expense are provided in the table below:
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| Three Months Ended | | Nine Months Ended |
| (In millions) | February 26, 2022 | | February 27, 2021 | | February 26, 2022 | | February 27, 2021 |
| Operating lease costs | $ | 23.7 | | | $ | 13.3 | | | $ | 64.8 | | | $ | 36.8 | |
| Short-term lease costs | 3.0 | | | 0.9 | | | 7.4 | | | 2.4 | |
| Variable lease costs* | 2.4 | | | 2.3 | | | 7.3 | | | 5.9 | |
| Total | $ | 29.1 | | | $ | 16.5 | | | $ | 79.5 | | | $ | 45.1 | |
*Not included in the table above for the three and nine months ended February 26, 2022 are variable lease costs of $22.7 million and $68.4 million, respectively, for raw material purchases under certain supply arrangements that the Company has determined meet the definition of a lease. This compares to purchases of $22.8 million and $61.40 million for the three and nine months ended February 27, 2021, respectively.
At February 26, 2022, the Company had no financing leases.
The undiscounted annual future minimum lease payments related to the Company's right-of-use assets are summarized by fiscal year in the following table:
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| 2022 | $ | 75.5 | |
| 2023 | 83.4 | |
| 2024 | 74.0 | |
| 2025 | 63.3 | |
| 2026 | 50.4 | |
| Thereafter | 145.7 | |
| Total lease payments* | $ | 492.3 | |
| Less interest | 21.2 | |
| Present value of lease liabilities | $ | 471.1 | |
*Lease payments exclude $1.8 million of legally binding minimum lease payments for leases signed but not yet commenced.
At February 26, 2022, the weighted average remaining lease term and weighted average discount rate for operating leases were 7.1 years and 2.5%, respectively.
Supplemental cash flow and other information related to leases are provided in the table below:
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| Three Months Ended | | Nine Months Ended |
| (In millions) | February 26, 2022 | | February 27, 2021 | | February 26, 2022 | | February 27, 2021 |
| Operating cash flows used in operating leases | $ | 28.9 | | | $ | 13.5 | | | $ | 62.6 | | | $ | 36.3 | |
| Right-of-use assets obtained in exchange for new liabilities | $ | 28.4 | | | $ | 7.1 | | | $ | 54.3 | | | $ | 55.7 | |
5. Acquisitions and Divestitures
Knoll, Inc.
On July 19, 2021, the Company completed its previously announced acquisition of Knoll, Inc. (“Knoll"), a leader in the design, manufacture, marketing, and sale of high-end furniture products and accessories for workplace and residential markets. The Company has included the financial results of Knoll in the condensed consolidated financial statements from the date of acquisition. The transaction costs associated with the acquisition, which included financial advisory, legal, proxy filing, regulatory and financing fees, were approximately $1.2 million and $28.8 million for the three and nine months ended February 26, 2022 and were recorded in general and administrative expenses.
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 preliminary acquisition date fair
value of the consideration transferred for Knoll was approximately $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 | | | | | |
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| Shares of Knoll Preferred Stock issued and outstanding at July 19, 2021 | 169,165 | | | | | 254.4 | |
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| Consideration for payment to settle Knoll's outstanding debt | | | | | 376.9 | |
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| 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 | |
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| Replacement Share-Based Awards: | | | | | |
| Outstanding awards of Knoll Restricted Stock and Performance units relating to Knoll Common Stock at July 19, 2021 | | | | | 22.4 | |
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| Total preliminary acquisition date fair value of consideration transferred | | | | | $ | 1,887.3 | |
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The aggregate cash paid in connection with the Knoll acquisition was $1,176.6 million. MillerKnoll funded the acquisition through cash on-hand and debt proceeds, as described in "Note 14. Short-Term Borrowings and Long-Term Debt."
Outstanding unvested restricted stock awards, performance stock awards, performance stock units, and restricted stock units with a preliminary estimated fair value of $53.4 million automatically converted into Company awards. Of the total fair value, $22.4 million was preliminarily allocated to purchase consideration and $31.0 million was preliminarily allocated to future services and will be expensed over the remaining service periods on a straight-line basis. Per the terms of the converted awards any qualifying termination within the twelve months subsequent to the acquisition will result 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 purchase price allocation is preliminary and subject to change as the valuation of inventory, property, plant and equipment, intangible assets and income taxes among other items is not complete. The amounts recognized will be finalized as the information necessary to complete the analysis is obtained, but no later than one year after the acquisition date.
The following table summarizes the preliminary fair value of assets acquired and liabilities assumed as of the date of acquisition:
MillerKnoll, Inc. and Subsidiaries 13
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| (In millions) | Fair Value |
| Cash | $ | 88.0 | |
| Accounts receivable | 82.3 | |
| Inventories | 219.9 | |
| Other current assets | 36.2 | |
| Property and equipment | 292.5 | |
| Right-of-use assets | 202.7 | |
| Intangible assets | 748.6 | |
| Goodwill | 941.4 | |
| Other noncurrent assets | 23.6 | |
| Total assets acquired | 2,635.2 | |
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| Accounts payable | 144.0 | |
| Other current liabilities | 134.1 | |
| Lease liabilities | 177.8 | |
| Other liabilities | 292.0 | |
| Total liabilities assumed | 747.9 | |
| 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 primarily attributed to the assembled workforce of Knoll and anticipated operational synergies. Goodwill related to the acquisition was recorded within the Knoll segment at $941.4 million. Goodwill arising from the acquisition is not expected to be deductible for tax reporting purposes.
The fair values assigned to tangible assets acquired and liabilities assumed are preliminary based on management's estimates and assumptions and may be subject to change as additional information is received and certain tax matters are finalized. Certain adjustments were made during the three months ended February 26, 2022 to the preliminary fair values resulting in a net decrease to goodwill of $2.3 million primarily related to adjustments to the value of certain liabilities acquired and the fair value of intangible assets acquired. The primary areas that remain preliminary relate to the fair values of intangible assets acquired, certain tangible assets and liabilities acquired, income and non-income-based taxes and residual goodwill. The Company expects to finalize the valuations as soon as practicable, but not later than one year from the acquisition date.
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:
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| (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 | | 413.0 | |
| Trade name - amortizing | Relief from Royalty | | 5-10 Years | | 23.0 | |
| Designs | Relief from Royalty | | 9-15 years | | 31.0 | |
| Customer Relationships | Multi-Period Excess Earnings | | 2-15 years | | 254.0 | |
| Total | | | | | $ | 748.6 | |
Revenue and Net Loss of Knoll included in the Company's Condensed Consolidated Statements of Comprehensive Income (Loss) from the acquisition date of July 19, 2021 through February 26, 2022 are as follows (in millions):
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| Total Revenue | $ | 829.5 | |
| Net Loss | $ | (63.4) | |
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 and February 27, 2021, as if Knoll had been acquired as of May 31, 2020. The pro forma results include certain purchase accounting adjustments such as the estimated change in depreciation and amortization expense on the acquired tangible and
intangible assets. The impact of these adjustments is subject to change as valuations are finalized. The pro forma results also include the impact of incremental interest expense incurred to finance the merger. Transaction related costs, including debt extinguishment costs related to the transaction, have been eliminated from the pro forma amounts presented in both periods. Pro forma results do not include any anticipated cost savings from the integration of this acquisition. Accordingly, such amounts are not necessarily indicative of the results that would have occurred if the acquisition had occurred on the date indicated or that may result in the future.
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| | | Three Months Ended | Nine Months Ended |
| (In millions) | | | February 26, 2022 | February 27, 2021 | February 26, 2022 | February 27, 2021 |
| Net sales | | | $ | 1,029.5 | | $ | 848.7 | | $ | 2,999.7 | | $ | 2,681.0 | |
| Net earnings (loss) attributable to MillerKnoll, Inc. | | | $ | 8.0 | | $ | 30.1 | | $ | (18.0) | | $ | 140.2 | |
Contract Furniture Dealership Divestiture
On January 31, 2022, the Company completed the sale of a wholly-owned contract furniture dealership in Toronto, Canada for cash consideration of $2.8 million. A pre-tax gain of $2.0 million was recognized as a result of the sale within the caption Selling, general and administrative within the Condensed Consolidated Statements of Comprehensive Income.
6. Inventories, net
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| (In millions) | February 26, 2022 | | May 29, 2021 |
| Finished goods and work in process | $ | 371.6 | | | $ | 166.7 | |
| Raw materials | 149.2 | | | 46.9 | |
| Total | $ | 520.8 | | | $ | 213.6 | |
Inventories are valued at the lower of cost or market and include material, labor, and overhead. Certain inventories within our United States-based manufacturing operations are valued using the last-in, first-out (LIFO) method. Inventories of all other operations are primarily valued using the first-in, first-out (FIFO) method.
Inventories valued using LIFO amounted to $25.9 million and $21.8 million as of February 26, 2022 and May 29, 2021, respectively. If all inventories had been valued using the first-in first-out method, inventories would have been $543.4 million and $230.2 million at February 26, 2022 and May 29, 2021, respectively.
7. 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 February 26, 2022 and May 29, 2021:
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| (In millions) | Goodwill | | Indefinite-lived Intangible Assets | | |
| May 29, 2021 | $ | 364.2 | | | $ | 97.6 | | | |
| Foreign currency translation adjustments | (22.6) | | | (6.8) | | | |
| Sale of owned dealer | (0.3) | | | — | | | |
| Acquisition of Knoll | 941.4 | | | 413.0 | | | |
| February 26, 2022 | $ | 1,282.7 | | | $ | 503.8 | | | |
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, with the exception of Knoll, were reviewed for impairment using a quantitative assessment as of March 31, 2021, our annual testing date. In performing the quantitative impairment test for fiscal year 2021, the Company
MillerKnoll, Inc. and Subsidiaries 15
determined that the fair value of its reporting units exceeded the carrying amount and, as such, these reporting units were not impaired.
In connection with the segment reorganization, certain Company 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 2022 for each reporting unit, with the exception of Knoll. Based on the results of the tests performed, the Company determined that the fair value of each reporting unit, as reorganized, exceeded its respective carrying amount in each case.
Goodwill related to the acquisition of Knoll was recorded within the Knoll segment at $941.4 million. The increase in goodwill from the acquisition of Knoll was offset in part by foreign currency translation adjustments as well a reduction due to the sale of an owned dealer, resulting in a goodwill balance of $1,282.7 million as of February 26, 2022.
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.
In fiscal 2021, the Company performed quantitative assessments in testing indefinite-lived intangible assets for impairment. The carrying value of the Company's HAY trade name indefinite-lived intangible asset was $41.7 million as of March 31, 2021. The calculated fair value of the HAY trade name was $43.8 million which represents an excess fair value of $2.1 million or 5.0%. If the residual cash flow related to this trade name were to decline in future periods, the Company may need to record an impairment charge.
During the nine months ended February 26, 2022, there were no identified indicators of impairment that required the Company to complete an interim quantitative impairment assessment related to any of the Company's reporting units or indefinitely-lived intangible assets.
8. Employee Benefit Plans
The following table summarizes the components of net periodic benefit cost for the Company's defined benefit pension plans:
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| Pension Benefits | | | | | | |
| Three Months Ended February 26, 2022 | | Three Months Ended February 27, 2021 | | | | |
| (In millions) | Domestic | | International | | Domestic | | International | | | | | | | | |
| Service cost | $ | 0.1 | | | $ | — | | | $ | — | | | $ | — | | | | | | | | | |
| Interest cost | 1.1 | | | 0.8 | | | — | | | 0.7 | | | | | | | | | |
Expected return on plan assets(1) | (2.1) | | | (1.8) | | | — | | | (1.5) | | | | | | | | | |
| Net amortization loss | — | | | 1.7 | | | — | | | 1.7 | | | | | | | | | |
| Net periodic benefit cost | $ | (0.9) | | | $ | 0.7 | | | $ | — | | | $ | 0.9 | | | | | | | | | |
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| Nine Months Ended February 26, 2022 | | Nine Months Ended February 27, 2021 | | | | | | | | |
| (In millions) | Domestic | | International | | Domestic | | International | | | | | | | | |
| Service cost | $ | 0.3 | | | $ | — | | | $ | — | | | $ | — | | | | | | | | | |
| Interest cost | 2.6 | | | 2.5 | | | — | | | 2.1 | | | | | | | | | |
Expected return on plan assets(1) | (5.2) | | | (5.4) | | | — | | | (4.3) | | | | | | | | | |
| Net amortization loss | — | | | 5.0 | | | — | | | 5.0 | | | | | | | | | |
| Net periodic benefit cost | $ | (2.3) | | | $ | 2.1 | | | $ | — | | | $ | 2.8 | | | | | | | | | |
(1)The weighted-average expected long-term rate of return on plan assets is 4.98%.
9. 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 |
| February 26, 2022 | | February 27, 2021 | | February 26, 2022 | | February 27, 2021 |
Numerators: | | | | | | | |
| Numerator for both basic and diluted EPS, Net earnings (loss) attributable to MillerKnoll, Inc. - in millions | $ | 12.6 | | | $ | 41.5 | | | $ | (52.3) | | | $ | 165.7 | |
| | | | | | | |
Denominators: | | | | | | | |
| Denominator for basic EPS, weighted-average common shares outstanding | 75,461,462 | | | 58,979,730 | | | 72,356,143 | | | 58,906,376 | |
| Potentially dilutive shares resulting from stock plans | 1,049,972 | | | 622,908 | | | — | | | 306,071 | |
| Denominator for diluted EPS | 76,511,434 | | | 59,602,638 | | | 72,356,143 | | | 59,212,447 | |
| Antidilutive equity awards not included in weighted-average common shares - diluted | 307,218 | | | 128,046 | | | 1,320,891 | | | 314,293 | |
10. 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) | February 26, 2022 | | February 27, 2021 | | February 26, 2022 | | February 27, 2021 |
| Stock-based compensation expense | $ | 4.9 | | | $ | 2.2 | | | $ | 27.0 | | | $ | 6.1 | |
| Related income tax effect | $ | 1.2 | | | $ | 0.5 | | | $ | 6.6 | | | $ | 1.4 | |
The increase in Stock-based compensation expense was driven in part by the addition of Knoll's equity-based compensation awards. This impact includes the accelerated stock-compensation award expense related to workforce reductions as part of the Knoll integration.
Certain of the Company's 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.
11. Income Taxes
The Company's process for determining the provision for income taxes for the three and nine months ended February 26, 2022 involved using an estimated annual effective tax rate which was based on expected annual income and statutory tax rates across the various jurisdictions in which it operates. The effective tax rates were 15.6% and 22.9%, respectively, for the three month periods ended February 26, 2022 and February 27, 2021. The year over year change in the effective tax rate for the three months ended February 26, 2022 resulted from an adjustment in the quarter resulting from the impact of the annual effective tax rate and the majority of the pre-tax loss for the year previously recorded through the first six months of the fiscal year. The same quarter of the prior year had no comparable impacts. For the three 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. For the three months ended February 27, 2021, the effective tax rate was higher than the United States federal statutory rate due to United States state income taxes and the mix of earnings in tax jurisdictions that had rates that were higher than the United States federal statutory rate.
The effective tax rates were 19.8% and 22.7%, respectively, for the nine months ended February 26, 2022 and February 27, 2021. The year over year decrease in the effective rate for the nine months ended February 26, 2022 resulted from an overall pre-tax book loss reported for the nine months coupled with non-deductible discrete compensation and acquisition costs in
MillerKnoll, Inc. and Subsidiaries 17
connection with the Knoll acquisition. The same nine months in the prior year had no comparable impacts from the acquisition. 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 includes an adjustment impacted by non-deductible Knoll acquisition related costs. For the nine months ended February 27, 2021, the effective tax rate was higher than the United States federal statutory rate mainly due to United States state income taxes and the mix of earnings in tax jurisdictions that had rates that were higher than the United States federal statutory rate.
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 February 26, 2022 and February 27, 2021.
The Company's recorded liability for potential interest and penalties related to uncertain tax benefits was:
| | | | | | | | | | | |
| (In millions) | February 26, 2022 | | May 29, 2021 |
| Liability for interest and penalties | $ | 1.0 | | | $ | 0.9 | |
| Liability for uncertain tax positions, current | $ | 2.7 | | | $ | 2.1 | |
| | | |
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 2018.
12. Fair Value Measurements
The Company's financial instruments consist of cash equivalents, marketable securities, accounts and notes receivable, a deferred compensation plan, accounts payable, debt, interest rate swaps, foreign currency exchange contracts, redeemable noncontrolling interests, indefinite-lived intangible assets, and right-of-use assets. The Company's financial instruments, other than long-term debt, are recorded at fair value.
The carrying value and fair value of the Company's long-term debt, including current maturities, is as follows for the periods indicated:
| | | | | | | | | | | |
| (In millions) | February 26, 2022 | | May 29, 2021 |
| Carrying value | $ | 1,434.0 | | | $ | 277.1 | |
| Fair value | $ | 1,308.5 | | | $ | 284.8 | |
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").
Mutual Funds-equity — The Company's equity securities primarily include equity mutual funds. The equity mutual fund investments are recorded at fair value using quoted prices for similar securities.
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 February 26, 2022 and May 29, 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | February 26, 2022 | | | | May 29, 2021 |
| 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 | $ | 28.0 | | | $ | — | | | | | $ | 162.2 | | | $ | — | | | |
| Mutual funds - equity | — | | | — | | | | | — | | | 0.8 | | | |
| Foreign currency forward contracts | — | | | 0.5 | | | | | — | | | 1.6 | | | |
| Deferred compensation plan | — | | | 16.2 | | | | | — | | | 16.1 | | | |
| Total | $ | 28.0 | | | $ | 16.7 | | | | | $ | 162.2 | | | $ | 18.5 | | | |
| | | | | | | | | | | |
| Financial Liabilities | | | | | | | | | | | |
| Foreign currency forward contracts | $ | — | | | $ | 0.4 | | | | | $ | — | | | $ | 0.1 | | | |
| | | | | | | | | | | |
| Total | $ | — | | | $ | 0.4 | | | | | $ | — | | | $ | 0.1 | | | |
In connection with the acquisition of Knoll, the Company acquired a contingent obligation related to Knoll's acquisition of Fully. During the period ended February 26, 2022 the Company paid the $10.0 million obligation in full.
The following describes the methods the Company uses to estimate the fair value of financial assets and liabilities recorded in other comprehensive income, the estimates have not significantly changed in the current period:
Mutual funds-fixed income — The Company's fixed-income securities primarily include fixed income mutual funds and government obligations. These investments are recorded at fair value using quoted prices for similar securities.
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 balance sheet locations and pricing levels to which the fair value measurements are classified within the fair value hierarchy as of February 26, 2022 and May 29, 2021.
| | | | | | | | | | | | | | | | | | | | |
| (In millions) | | | | February 26, 2022 | | May 29, 2021 |
| Financial Assets | | Balance Sheet Location | | Quoted Prices with Other Observable Inputs (Level 2) | | Quoted Prices with Other Observable Inputs (Level 2) |
| Mutual funds - fixed income | | Short-term investments | | $ | — | | | $ | 6.9 | |
| Interest rate swap agreement | | Other noncurrent assets | | 5.3 | | — | |
| Total | | | | $ | 5.3 | | | $ | 6.9 | |
| | | | | | |
| Financial Liabilities | | | | | | |
| Interest rate swap agreement | | Other liabilities | | $ | 2.3 | | | $ | 14.4 | |
| | | | | | |
| Total | | | | $ | 2.3 | | | $ | 14.4 | |
The following is a summary of the carrying and market values of the Company's fixed income mutual funds and equity mutual funds as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| February 26, 2022 | | May 29, 2021 |
| (In millions) | Cost | | Unrealized
Gain/(Loss) | | Market
Value | | Cost | | Unrealized
Gain/(Loss) | | Market
Value |
| Mutual funds - fixed income | $ | — | | | $ | — | | | $ | — | | | $ | 6.9 | | | $ | — | | | $ | 6.9 | |
| Mutual funds - equity | — | | | — | | | — | | | 0.5 | | | 0.3 | | | 0.8 | |
| Total | $ | — | | | $ | — | | | $ | — | | | $ | 7.4 | | | $ | 0.3 | | | $ | 7.7 | |
During the third Quarter, the fixed income mutual funds and equity mutual funds were dissolved and converted to cash. The cost of securities sold is based on the specific identification method; realized gains and losses resulting from such sales are included in the Condensed Consolidated Statements of Comprehensive Income within "Other (income) expense, net". The Company views its equity and fixed income mutual funds as available for use in its current operations. Accordingly, the investments are recorded within Current Assets within the Condensed Consolidated Balance Sheets.
Derivative Instruments and Hedging Activities
MillerKnoll, Inc. and Subsidiaries 19
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 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 January, 2022, the company entered into a third interest rate swap agreement. The interest rate swap is for an aggregate notional amount of $575 million with a forward start date of January 31, 2022 and a maturity date of January 29, 2027. The interest rate swap locked in the Company’s interest rate on the forecasted outstanding borrowings of $575 million at 1.689 percent exclusive of the credit spread on the variable rate debt. The company effectively will convert indebtedness anticipated to be borrowed on the company’s revolving line of credit from a LIBOR-based floating interest rate plus applicable margin to a 1.689 percent fixed interest rate plus applicable margin under the agreement as of the forward start date.
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 February 26, 2022. Since a designated derivative meets hedge accounting criteria, the fair value of the hedge is recorded in the Consolidated Statements of Stockholders’ Equity as a component of "Accumulated other comprehensive loss, net of tax." The ineffective portion of the change in fair value of the derivatives is immediately recognized in earnings. The interest rate swap agreements are assessed for hedge effectiveness on a quarterly basis
As of February 26, 2022, the Company had the following three outstanding interest rate swap agreements:
| | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | Notional Amount | | Forward Start Date | | Termination Date | | Effective Fixed Interest Rate |
| September 2016 Interest Rate Swap | $ | 150.0 | | | January 3, 2018 | | January 3, 2028 | | 1.949 | % |
| June 2017 Interest Rate Swap | $ | 75.0 | | | January 3, 2018 | | January 3, 2028 | | 2.387 | % |
| January 2022 Interest Rates Swap | $ | 575.0 | | | January 31, 2022 | | January 29, 2027 | | 1.689 | % |
The swaps above effectively converted indebtedness anticipated to be borrowed on the Company's revolving line of credit up to the notional amounts from a LIBOR-based floating interest rate plus applicable margin to an effective fixed interest rate plus applicable margin under the agreements as of the forward start date.
The following table summarizes the effects of the interest rate swap agreements for the three and nine months ended:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| (In millions) | February 26, 2022 | | February 27, 2021 | | February 26, 2022 | | February 27, 2021 |
| Gain recognized in Other comprehensive loss (effective portion) | $ | 10.2 | | | $ | 6.7 | | | $ | 13.2 | | | $ | 7.8 | |
| (Loss) reclassified from Accumulated other comprehensive loss into earnings | $ | (1.1) | | | $ | (1.1) | | | $ | (3.1) | | | $ | (3.3) | |
There were no gains or losses recognized in earnings for hedge ineffectiveness for the three and nine month periods ended February 26, 2022 and February 27, 2021. The amount of loss expected to be reclassified from Accumulated other comprehensive loss into earnings during the next twelve months is $2.7 million, and net of tax is $2.0 million.
Redeemable Noncontrolling Interests
Changes in the Company's redeemable noncontrolling interest in HAY for the nine months ended February 26, 2022 and February 27, 2021 are as follows:
| | | | | | | | | | | |
| (In millions) | February 26, 2022 | | February 27, 2021 |
| Beginning Balance | $ | 77.0 | | | $ | 50.4 | |
| | | |
| Net income attributable to redeemable noncontrolling interests | 5.7 | | | 3.8 | |
| | | |
| Distributions to redeemable noncontrolling interests | (6.6) | | | (2.7) | |
| Cumulative translation adjustments attributable to redeemable noncontrolling interests | (2.0) | | | 3.1 | |
| Foreign currency translation adjustments | (6.0) | | | 4.5 | |
| Ending Balance | $ | 68.1 | | | $ | 59.1 | |
13. 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 program. 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) | February 26, 2022 | | February 27, 2021 | | February 26, 2022 | | February 27, 2021 |
| Accrual Balance — beginning | $ | 69.9 | | | $ | 59.9 | | | $ | 60.1 | | | $ | 59.2 | |
| Accrual for warranty matters | 2.8 | | | 2.5 | | | 12.0 | | | 8.5 | |
| Settlements and adjustments | (3.8) | | | (3.3) | | | (13.3) | | | (8.6) | |
| Measurement period adjustment to opening balance sheet | 5.0 | | | — | | | — | | | — | |
| Acquired through business acquisition | — | | | — | | | 15.1 | | | $ | — | |
| Accrual Balance — ending | $ | 73.9 | | | $ | 59.1 | | | $ | 73.9 | | | $ | 59.1 | |
During the third quarter of 2022, MillerKnoll revised the fair value of warranty reserve liability acquired in the Knoll transaction as a measurement period adjustment. This measurement period adjustment resulted in a $5.0 million change in the warranty reserve as of the July 19th opening balance sheet, with the offset of the change impacting goodwill recorded in the transaction.
Guarantees
MillerKnoll, Inc. and Subsidiaries 21
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 February 26, 2022, the Company had a maximum financial exposure related to performance bonds totaling approximately $6.6 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 February 26, 2022 or May 29, 2021.
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 February 26, 2022, the Company had a maximum financial exposure from these standby letters of credit totaling approximately $15.4 million, all of which is considered usage against the Company's revolving line of credit. The Company has no history of claims, nor is it aware of circumstances that would require it to perform, under any of these arrangements and believes that the resolution of any claims that might arise in the future, either individually or in the aggregate, would not materially affect the Company's Consolidated Financial Statements. Accordingly, no liability has been recorded in respect to these arrangements as of February 26, 2022 or May 29, 2021.
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.
14. Short-Term Borrowings and Long-Term Debt
Short-term borrowings and long-term debt as of February 26, 2022 and May 29, 2021 consisted of the following:
| | | | | | | | | | | |
| (In millions) | February 26, 2022 | | May 29, 2021 |
| | | |
| | | |
Debt securities, 4.95%, due May 20, 2030 | $ | — | | | $ | 49.9 | |
| Syndicated revolving line of credit, due August 2024 | — | | | 225.0 | |
| Syndicated revolving line of credit, due July 2026 | 413.0 | | | — | |
| | | |
Term Loan A, 1.875%, due July 2026 | 395.0 | | | — | |
Term Loan B, 2.125%, due July 2028 | 623.4 | | | — | |
| Supplier financing program | 2.6 | | | 2.2 | |
| Total debt | $ | 1,434.0 | | | $ | 277.1 | |
| Less: Unamortized discount and issuance costs | (20.3) | | | — | |
| Less: Current portion of long-term debt | (28.8) | | | (2.2) | |
| Long-term debt | $ | 1,384.9 | | | $ | 274.9 | |
As of May 29, 2021, the Company's syndicated revolving line of credit provided the Company with up to $500 million in revolving variable interest borrowing capacity and included an "accordion feature" allowing the Company to increase, at its option and subject to the approval of the participating banks, the aggregate borrowing capacity of the facility by up to $250 million. Outstanding borrowings bear interest at rates based on the prime rate, federal funds rate, LIBOR, or negotiated rates as outlined in the agreement. Interest is payable periodically throughout the period if borrowings are outstanding. The Company paid off the outstanding balance due on the syndicated revolving line of credit during the first quarter of 2022.
In connection with the acquisition of Knoll, in July, 2021, the Company entered into a credit agreement that provided for a syndicated revolving line of credit and two term loans. The revolving line of credit provides the Company with up to $725 million in revolving variable interest borrowing capacity that matures in July 2026, replacing the previous $500 million syndicated revolving line of credit. The term loans consist of a five-year senior secured term loan "A" facility with an aggregate principal amount of $400 million and a seven-year senior secured term loan "B" facility with an aggregate principal amount of $625 million, the proceeds of which were used to finance a portion of the cash consideration for the acquisition of Knoll, for the repayment of certain debt of Knoll, and to pay fees, costs, and expenses related thereto. Both term loans have a variable interest
rate. The Company also repaid $64 million of private placement notes due May 20, 2030. A loss on extinguishment of debt of approximately $13.4 million was recognized as part of the repayment of the private placement notes, which represented the premium on early redemption. The Company made principal payments on term loan "A" and "B" during the three months ended February 26, 2022 in the amount of $5.0 million and $1.6 million, respectively.
Available borrowings under the syndicated revolving line of credit were as follows for the periods indicated:
| | | | | | | | | | | | |
| (In millions) | | February 26, 2022 | | May 29, 2021 |
| Syndicated revolving line of credit borrowing capacity | | $ | 725.0 | | | $ | 500.0 | |
| Less: Borrowings under the syndicated revolving line of credit | | 413.0 | | | 225.0 | |
| Less: Outstanding letters of credit | | 15.4 | | | 9.8 | |
Available borrowings under the syndicated revolving line of credit | | $ | 296.6 | | | $ | 265.2 | |
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 the caption “Accounts payable” in the Condensed Consolidated Balance Sheets as the amounts have been accounted for by the Company as current debt, within the caption “Short-term borrowings and current portion of long-term debt”.
15. Accumulated Other Comprehensive Loss
The following table provides an analysis of the changes in accumulated other comprehensive loss for the nine months ended February 26, 2022 and February 27, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | Cumulative Translation Adjustments | | Pension and Other Post-retirement Benefit Plans | | Unrealized
Gains on Available-for-sale Securities | | Interest Rate Swap Agreements | | Accumulated Other Comprehensive Loss |
| 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) | |
| | | | | | | | | |
| Balance at May 30, 2020 | $ | (56.0) | | | $ | (59.2) | | | $ | 0.1 | | | $ | (18.9) | | | $ | (134.0) | |
| | | | | | | | | |
| Other comprehensive income (loss), net of tax before reclassifications | 42.8 | | | — | | | (0.1) | | | 11.1 | | | 53.8 | |
| Reclassification from accumulated other comprehensive loss - Other, net | — | | | 4.5 | | | — | | | (3.3) | | | 1.2 | |
| Tax benefit | — | | | (0.8) | | | — | | | — | | | (0.8) | |
| Net reclassifications | — | | | 3.7 | | | — | | | (3.3) | | | 0.4 | |
| Net current period other comprehensive income (loss) | 42.8 | | | 3.7 | | | (0.1) | | | 7.8 | | | 54.2 | |
| Balance at February 27, 2021 | $ | (13.2) | | | $ | (55.5) | | | $ | — | | | $ | (11.1) | | | $ | (79.8) | |
16. Operating Segments
MillerKnoll, Inc. and Subsidiaries 23
Effective as of May 30, 2021, the beginning of fiscal year 2022, 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 activities related to the manufacture and sale of furniture products direct to consumers and to third-party retailers that previously resided within the International Contract segment moved to the Global Retail segment.
•The operations associated with the design, manufacture and sale of furniture products for work-related settings in Latin America moved from the International Contract segment to the North America Contract segment to form a new Americas Contract segment.
•Operations of the DWR Contract business, a division of DWR that sells design furnishings and accessories for use in work-related settings moved into the Americas Contract segment.
The Company's reportable segments now consist of Americas Contract, International Contract, Global Retail, and Knoll. Intersegment sales are eliminated within each segment, with the exception of sales to and from the Knoll segment, which are presented as intersegment eliminations.
The Americas Contract segment includes the operations associated with the design, manufacture and sale of furniture and textile products for work-related settings, including office, healthcare, and educational environments, throughout North America and South America. In addition to the Herman Miller brand and the DWR Contract business, this segment includes the operations associated with the design, manufacture and sale of high-craft furniture products and textiles including Geiger wood products, Maharam textiles, Herman Miller Healthcare, naughtone and Herman Miller Collection products.
The International Contract segment includes the operations associated with the design, manufacture and sale of furniture products, primarily for work-related settings in Europe, the Middle East and Africa ("EMEA") and Asia-Pacific.
The Global Retail segment includes 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, DWR studios and HAY stores.
The Knoll segment includes the global operations associated with the design, manufacture, and sale of furniture products within the Knoll constellation of brands.
Intersegment sales are eliminated within each segment, with the exception of sales to and from the Knoll segment, which are presented as intersegment eliminations.
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) | February 26, 2022 | | February 27, 2021 | | February 26, 2022 | | February 27, 2021 |
| Net Sales: | | | | | | | |
| Americas Contract | $ | 365.1 | | | $ | 290.7 | | | $ | 1,052.0 | | | $ | 1,008.0 | |
| International Contract | 123.4 | | | 98.0 | | | 347.4 | | | 293.5 | |
| Global Retail | 212.8 | | | 201.8 | | | 635.4 | | | 542.1 | |
| Knoll | 336.9 | | | — | | | 829.5 | | | — | |
| Intersegment Eliminations | (8.7) | | | — | | | (18.8) | | | — | |
| Total | $ | 1,029.5 | | | $ | 590.5 | | | $ | 2,845.5 | | | $ | 1,843.6 | |
| | | | | | | |
| Operating Earnings (Loss): | | | | | | | |
| Americas Contract | $ | 2.7 | | | $ | 14.6 | | | $ | 18.5 | | | $ | 111.6 | |
| International Contract | 12.5 | | | 11.0 | | | 40.8 | | | 40.1 | |
| Global Retail | 24.0 | | | 39.9 | | | 74.2 | | | 100.7 | |
| Knoll | 1.5 | | | — | | | (72.8) | | | — | |
| Corporate | (14.2) | | | (10.4) | | | (83.2) | | | (30.9) | |
| Total | $ | 26.5 | | | $ | 55.1 | | | $ | (22.5) | | | $ | 221.5 | |
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.
17. 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 and non-cash severance, including accelerated equity award compensation expense. The Company also incurs expenses that are an integral component of, and directly attribute to, our restructuring and integration activities, which do not qualify as exit and disposal costs under U.S. GAAP. These include integration implementation costs that relate primarily to professional fees and non-cash losses incurred on debt extinguishment.
The expense associated with integration initiatives are included in Selling, General, and Administrative and the expense associated with restructuring activities are included in Restructuring expense in the Condensed Consolidated Statements of Comprehensive Income. Non-cash costs related to debt extinguishment in the financing of the transaction is recorded in Other expense (income), net in the Condensed Consolidated Statements of Comprehensive Income.
Knoll Integration:
Following the Knoll merger the Company announced a multi-year program (the "Knoll Integration") designed to reduce costs, integrate and optimize the combined organization. The Company currently expects that the Knoll Integration will result in pre-tax costs that are expected not to exceed approximately $100 million to $120 million, comprised of the following categories:
•Severance and employee benefit costs associated with plans to integrate our operating structure, resulting in workforce reductions. These costs will primarily include: severance and employee benefits (cash severance and non-cash severance, including accelerated stock-compensation award expense and other termination benefits).
•Exit and disposal activities include those incurred as a direct result of integration activities, primarily including contract and lease terminations and asset impairment charges.
•Other integration costs include professional fees and other incremental third-party expenses, including a loss on extinguishment of debt associated with financing of the merger.
For the nine months ended February 26, 2022, we have 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.
MillerKnoll, Inc. and Subsidiaries 25
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 February 26, 2022:
| | | | | | | | | | | |
| (In millions) | Severance and Employee Benefit | Exit and Disposal Activities | Total |
| May 29, 2021 | $ | — | | $ | — | | $ | — | |
| Integration Costs | 49.9 | | 15.5 | | 65.4 | |
| Amounts Paid | (28.7) | | — | | (28.7) | |
| Non-cash costs | (14.3) | | (15.5) | | (29.8) | |
| February 26, 2022 | $ | 6.9 | | $ | — | | $ | 6.9 | |
The Company's expects that a substantial portion of the liability for the Knoll Integration as of February 26, 2022 to be paid in fiscal year 2022.
The following is a summary of integration expenses by segment for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| (In millions) | February 26, 2022 | | February 27, 2021 | | February 26, 2022 | | February 27, 2021 |
| Americas Contract | $ | 0.5 | | | $ | — | | | $ | 4.9 | | | $ | — | |
| International Contract | 0.4 | | | — | | | 1.1 | | | — | |
| Retail | — | | | — | | | 0.5 | | | — | |
| Knoll | 2.6 | | | — | | | 59.0 | | | — | |
| Corporate | 2.4 | | | — | | | 36.2 | | | — | |
| Total | $ | 5.9 | | | $ | — | | | $ | 101.7 | | | $ | — | |
Restructuring Activities: During the fourth quarter of fiscal 2018, the Company announced a facilities consolidation plan related to its International Contract segment. This impacted certain office and manufacturing facilities in the United Kingdom and China. The plan is expected to generate cost savings of approximately $3 million. To date, the Company recognized restructuring and impairment expenses of $5.9 million, with a net credit of $1.9 million recognized in fiscal 2021 and the remainder in fiscal 2020, 2019, and 2018. These expenses related to the facilities consolidation plan, comprised primarily of an asset impairment recorded against an office building in the United Kingdom that was vacated and the consolidation of the Company's manufacturing facilities in China. No future restructuring costs related to the plan are expected as the plan is substantially complete.
The office building and related assets in China were sold in the first quarter of fiscal 2021, resulting in a gain of approximately $3.4 million. The office building and related assets in the United Kingdom were sold in the second quarter of fiscal 2021, resulting in a nominal gain. Both of these gains are included within "Restructuring expense" in the Condensed Consolidated Statements of Comprehensive Income.
In the second quarter of fiscal 2020, the Americas Contract segment initiated restructuring discussions with labor unions related to its Healthcare operation in Wisconsin. To date, the Company has recorded approximately $3.1 million in pre-tax restructuring expense related to this plan, with a net credit of $0.1 million recognized in fiscal 2021 and the remainder in fiscal 2020. The plan is complete and no future costs related to this plan are expected.
In the second quarter of fiscal 2020, the Company initiated a reorganization of the Global Sales and Product teams. The reorganization activities occurred primarily in the North America business with additional costs incurred internationally. To date, the Company has recorded a total of $2.6 million in pre-tax restructuring expense related to this plan. The reorganization is complete and no future costs related to this plan are expected.
The following table provides an analysis of the changes in the restructuring costs reserve for the above plans for the nine months ended February 26, 2022:
| | | | | | | | | | | | |
| (In millions) | Severance and Employee-Related | | Exit or Disposal Activities | Total |
| May 29, 2021 | $ | 0.9 | | | $ | 0.6 | | $ | 1.5 | |
| Restructuring Costs | — | | | — | | — | |
| Amounts Paid | (0.5) | | | — | | (0.5) | |
| | | | |
| February 26, 2022 | $ | 0.4 | | | $ | 0.6 | | $ | 1.0 | |
In the fourth quarter of fiscal 2020, the Company announced a restructuring plan (“May 2020 restructuring plan") to substantially reduce expenses in response to the impact of the COVID-19 pandemic and related restrictions. These activities included voluntary and involuntary reductions in its North American and International workforces. Combined, these actions resulted in the elimination of approximately 400 full-time positions throughout the Company in various businesses and functions. As the result of these actions, the Company projects an annualized expense reduction of approximately $40 million. To date, the Company incurred severance and related charges of $18.7 million with $3.4 million recognized in fiscal 2021 and the remainder in fiscal 2020. No material future restructuring costs related to the plan are expected and the remaining amounts will be paid in fiscal 2022.
The following table provides an analysis of the changes in the restructuring cost reserve for the May 2020 restructuring plan for the nine months ended February 26, 2022:
| | | | | | | |
| (In millions) | Severance and Employee-Related | | |
| May 29, 2021 | $ | 1.0 | | | |
| Restructuring Costs | — | | | |
| Amounts Paid | (0.7) | | | |
| February 26, 2022 | $ | 0.3 | | | |
The following is a summary of restructuring expenses by segment for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| (In millions) | February 26, 2022 | | February 27, 2021 | | February 26, 2022 | | February 27, 2021 |
| Americas Contract | $ | — | | | $ | 0.2 | | | $ | — | | | $ | 2.6 | |
| International Contract | — | | | 0.1 | | | — | | | (1.1) | |
| Global Retail | — | | | — | | | — | | | — | |
| Knoll | — | | | — | | | — | | | — | |
| | | | | | | |
| Total | $ | — | | | $ | 0.3 | | | $ | — | | | $ | 1.5 | |
18. Variable Interest Entities
During the three months ended February 26, 2022,the Company entered into long-term notes receivable with certain of its third-party owned dealers that are deemed to be variable interests in variable interest entities. The carrying value of these long-term notes receivable was $1.2 million as of February 26, 2022 and 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 entity controls the activities that most significantly impact the entity’s economic performance, including sales, marketing, and operations.
The Company previously held a long-term note receivable with a third-party dealer that was deemed to be a variable interest in a variable interest entity. The carrying value of this long-term note receivable was $1.2 million as of May 29, 2021 and was paid in full during the quarter ended August 28, 2021.
MillerKnoll, Inc. and Subsidiaries 27