10-Q: MillerKnoll Q2 Earnings Dip, Orders Rise Amid Restructuring

MillerKnoll reports a 29% drop in Q2 net earnings to $24.2 million despite a 5.5% increase in orders, as sales decline and operating expenses rise.

Summary

• Net sales for the three months ended November 29, 2025, decreased by 1.6% to $955.2 million compared to $970.4 million in the prior year period.
• Organic net sales for the quarter decreased by 2.5% to $946.5 million.
• Orders for the quarter increased by 5.5% to $972.5 million, with organic orders up 4.5% to $963.4 million.
• Gross margin improved slightly to 39.0% for the quarter, up 20 basis points from 38.8% in the prior year, driven by favorable product and channel mix and price increases, partially offset by tariffs and fixed cost leverage.
• Operating expenses increased by 2.9% to $323.7 million, primarily due to retail store expansion costs and higher compensation.
• Net earnings attributable to MillerKnoll, Inc. for the quarter were $24.2 million, a 29.0% decrease from $34.1 million in the prior year.
• Diluted earnings per share for the quarter decreased to $0.35 from $0.49, while adjusted diluted EPS was $0.43, down 21.8%.
• For the six months ended November 29, 2025, net sales increased 4.3% to $1,910.9 million, and net earnings attributable to MillerKnoll, Inc. rose 35.0% to $44.4 million.
• The company entered into a three-year accounts receivable securitization facility for up to $90.0 million in September 2025, with net proceeds of $54.3 million.
• A 2026 restructuring plan was announced in Q1 FY26, incurring $1.5 million in charges for the quarter and $2.0 million for the six months, related to facilities consolidation.
• Term Loan B was refinanced, extending its maturity to August 2032 and resulting in a $7.8 million debt extinguishment loss.
• Total liquidity (cash and revolving line of credit availability) stood at $548.3 million as of November 29, 2025.

Sentiment

Score: 4

Explanation: The sentiment is moderately negative due to significant declines in quarterly net earnings and diluted EPS, coupled with increased operating expenses and ongoing tariff pressures. While orders increased and six-month results show growth, the immediate quarterly performance and the impact of debt extinguishment and restructuring charges weigh down the sentiment. Management changes are positive for leadership stability but don't immediately offset financial declines.

Positives

• Orders increased by 5.5% to $972.5 million for the quarter, indicating future revenue potential.
• Gross margin improved by 20 basis points to 39.0% for the quarter, driven by favorable product/channel mix and price increases.
• Net sales for the six months increased by 4.3% to $1,910.9 million, and net earnings for the six months increased by 35.0% to $44.4 million.
• Operating earnings for the six months increased significantly by 31.3% to $102.0 million.
• The Global Retail segment showed strong growth, with net sales up 4.7% and orders up 6.0% for the quarter, supported by North America retail store expansion.
• Successful refinancing of Term Loan A and Term Loan B, extending maturities to April 2030 and August 2032, respectively, improving debt structure.
• Established a new three-year accounts receivable securitization facility, adding up to $90.0 million in liquidity.
• Strong liquidity position with $548.3 million in total liquidity (cash and credit facility availability) as of November 29, 2025.

Negatives

• Net sales for the three months ended November 29, 2025, decreased by 1.6% to $955.2 million.
• Net earnings attributable to MillerKnoll, Inc. for the quarter decreased by 29.0% to $24.2 million.
• Diluted earnings per share for the quarter decreased by 28.6% to $0.35.
• Operating earnings for the quarter decreased by 22.4% to $48.5 million.
• Operating expenses increased by 2.9% for the quarter, driven by retail store expansion and higher compensation costs.
• Tariff-related costs negatively impacted gross margin by approximately 70 basis points for the quarter and 110 basis points for the six months, despite pricing actions.
• Loss of leverage on fixed costs due to lower sales volumes negatively impacted gross margin by 50 basis points for the quarter.
• International Contract segment experienced a 6.3% decrease in net sales (9.2% organically) and a 28.4% decrease in operating earnings for the quarter.
• Global Retail segment's operating earnings decreased by 50.6% for the quarter, despite sales growth, due to increased operating expenses and tariff impacts.
• Adjusted diluted EPS for the six months decreased by 1.1% to $0.88.
• A $7.8 million loss on extinguishment of debt was incurred in connection with the refinancing of Term Loan B.

Risks

• Changes to U.S. and international trade policies, including new or increased tariffs and changing import/export regulations, impacting material costs, availability, and product demand.
• Challenges in implementing growth strategy and the possibility that underlying assumptions prove inaccurate.
• Consumer spending levels significantly impacting demand for products within the Global Retail segment.
• Global and national economic conditions such as heightened inflation, uncertainty regarding future interest rates, foreign currency exchange rate fluctuations, escalating tensions in the Middle East, and the continuation of the Russia-Ukraine war.
• Cybersecurity threats and risks.
• Public health crises, such as pandemics and epidemics, and governmental policies and actions.
• Risks related to additional debt incurred from the Knoll acquisition, including increased interest expense, ability to comply with debt covenants, and limitations on business activities.
• Availability and pricing of raw materials.
• Financial strength of dealers and customers.
• Pace and level of government procurement.
• Outcome of pending litigation or governmental audits or investigations.

Future Outlook

The company expects full-year capital purchases for fiscal year 2026 to be between $120 million and $130 million, primarily for investments in facilities (manufacturing, showrooms, retail stores) and equipment, as well as sustainability goals. The company believes current cash on hand, cash generated from operations, and borrowing capacity will provide adequate liquidity for near-term and foreseeable future business operations, capital needs, upcoming debt maturities, future dividends, and share repurchases.

Management Comments

• Net sales were $955.2 million and orders were $972.5 million, representing a decrease of 1.6% and an increase of 5.5%, respectively, when compared to the same quarter of the prior year.
• Gross margin in the second quarter was 39.0%, an increase of 20 basis points when compared to the same quarter of the prior year, related primarily to the impact of favorable product and channel mix as well as the benefit from price increase actions, which more than offset cost pressures from tariffs and unfavorable leverage of fixed operations costs on lower sales volume.
• Operating expenses increased $9.2 million or 2.9% as compared to the same quarter of the prior year. The increase was driven primarily from costs associated with the expansion of the retail store footprint in North America and increased fixed and variable compensation costs.
• Diluted earnings per share in the quarter was $0.35 as compared to $0.49 in the prior year. Adjusted diluted earnings per share was $0.43, a 21.8% decrease as compared to the prior year quarter.
• The company had a well-positioned balance sheet and liquidity profile at the end of the second quarter of fiscal 2026.

Industry Context

The company operates in the interior furnishings industry, serving residential, office, healthcare, and educational settings. The mixed quarterly results, with declining sales but increasing orders, suggest a dynamic market. The expansion of the retail store footprint in North America indicates a strategic focus on the Global Retail segment, which showed sales growth. However, tariff-related costs continue to be a headwind, reflecting broader global trade policy impacts on manufacturing and supply chains. Increased operating expenses due to compensation and expansion could be a response to competitive pressures or a strategic investment for future growth in a challenging economic environment characterized by inflation and interest rate uncertainty.

Comparison to Industry Standards

• NA

Management Changes

Corporate Governance

Legal Proceedings

• No material changes in legal proceedings from those set forth in the Annual Report on Form 10-K for the year ended May 31, 2025. Management believes the outcome of current proceedings will not have a material adverse effect on the Consolidated Financial Statements.

Related Party Transactions

• NA

Stakeholder Impact

• **Shareholders**: Negative impact from decreased quarterly net earnings and diluted EPS, but potential positive from increased orders and share repurchase program. Long-term alignment through executive stock ownership guidelines.
• **Employees**: Impacted by restructuring activities involving workforce reductions and facility consolidations, though new executive appointments signal leadership stability.
• **Customers**: Potential benefit from retail store expansion and continued product development, but may face price increases due to tariff cost pressures.
• **Suppliers**: Participation in a supplier financing program allows certain suppliers to finance payment obligations, potentially affecting their cash flow management.
• **Creditors**: Debt refinancing extends maturities, improving the company's debt profile, and the new securitization facility provides additional working capital, enhancing the company's ability to meet obligations.

Next Steps

• Continue with the 2026 restructuring plan, including facilities consolidation, to reduce expenses.
• Fund capital commitments of $17.6 million and projected full-year capital purchases of $120 million to $130 million for facilities, equipment, and sustainability goals.
• Repatriate $137.3 million of undistributed foreign earnings.
• Continue to evaluate market conditions for potential share repurchases under the existing authorization of $169.2 million.

Key Dates

Recommendation

The company's Q2 performance shows a significant decline in net earnings and EPS, which is a concern. However, the increase in orders suggests underlying demand, and the six-month results are more positive. Strategic initiatives like retail expansion and debt refinancing are underway, but tariff headwinds and increased operating costs are impacting profitability. The stock ownership guidelines for executives are a positive for long-term alignment. Given the mixed signals—short-term underperformance against longer-term strategic moves and order growth—a 'hold' recommendation is appropriate. Investors should monitor the effectiveness of restructuring, the impact of retail expansion, and the ability to mitigate tariff costs in upcoming quarters before making a more definitive move.

Keywords

MillerKnoll, MLKN, SEC Filing, 10-Q, Quarterly Report, Financial Results, Earnings, Sales, Orders, Gross Margin, Operating Expenses, EPS, Debt Refinancing, Restructuring, Corporate Governance, Furniture, Interior Furnishings, Workplace Solutions, Global Retail, North America Contract, International Contract, Design, Manufacturing, Herman Miller, Knoll