10-Q: MillerKnoll Reports Strong Sales Growth, Orders Decline

MillerKnoll, Inc. reported a significant increase in net sales and a return to profitability for the first quarter of fiscal 2026, though new orders and backlog experienced declines.

Summary

• Net sales for the three months ended August 30, 2025, increased by 10.9% to $955.7 million, or 10.0% on an organic basis, compared to $861.5 million in the prior year.
• New orders decreased by 5.4% to $885.4 million, or 6.2% organically, compared to $935.9 million in the prior year.
• Gross margin was 38.5%, a decrease of 50 basis points from 39.0% in the prior year, primarily due to increased net tariff-related costs.
• Operating expenses decreased by 2.0% to $314.6 million, largely due to a $27.8 million reduction in acquisition-related integration charges.
• Operating earnings surged by 252.0% to $53.5 million, up from $15.2 million in the prior year.
• Net earnings attributable to MillerKnoll, Inc. were $20.2 million, a significant improvement from a net loss of $1.2 million in the prior year.
• Diluted earnings per share were $0.29, compared to a diluted loss per share of $0.02 in the prior year.
• Adjusted diluted earnings per share increased by 25.0% to $0.45, up from $0.36 in the prior year quarter.
• Backlog decreased by 8.9% to $690.9 million from $758.0 million in the prior year.
• Net cash provided by operating activities was $9.4 million, down from $21.1 million in the prior year, primarily due to a net increase in working capital.
• The company completed amendments to its Credit Agreement in April 2025 and August 2025, extending maturities for Term Loan A and Term Loan B to April 2030 and August 2032, respectively.
• A non-cash loss on extinguishment of debt of $7.8 million was recognized in connection with the Term Loan B refinancing.

Sentiment

Score: 7

Explanation: The sentiment is moderately positive due to strong sales growth, a significant increase in operating earnings, and a return to net profitability. Proactive debt management and liquidity measures are also positive. However, declining orders and backlog, along with persistent tariff pressures and a decrease in cash from operations, temper the overall optimism, indicating underlying challenges in demand and cost management.

Positives

• Net sales increased by 10.9% to $955.7 million, demonstrating strong top-line growth.
• Operating earnings significantly improved by 252.0% to $53.5 million.
• The company returned to profitability with net earnings of $20.2 million, compared to a net loss in the prior year.
• Adjusted diluted earnings per share increased by 25.0% to $0.45, indicating improved underlying operational performance excluding certain non-recurring items.
• North America Contract segment net sales grew by 12.1% on both reported and organic bases, driven by increased sales volumes and price increases.
• International Contract segment net sales increased by 14.4% reported and 11.3% organically, also due to higher sales volumes.
• Global Retail segment net sales rose by 6.4% reported and 4.9% organically, supported by increased sales volumes.
• Operating expenses decreased due to a substantial reduction in acquisition-related integration charges, reflecting progress in post-acquisition synergy realization.
• Successful refinancing of Term Loan A and Term Loan B extended debt maturities to April 2030 and August 2032, respectively, improving the debt maturity profile.
• No goodwill or indefinite-lived intangible impairment triggering events were identified in the first quarter of fiscal year 2026.

Negatives

• New orders decreased by 5.4% to $885.4 million, indicating softening demand for future periods.
• Backlog declined by 8.9% to $690.9 million, suggesting reduced future revenue visibility.
• Gross margin decreased by 50 basis points to 38.5%, primarily due to increased net tariff-related costs.
• Net cash provided by operating activities decreased to $9.4 million from $21.1 million in the prior year, mainly due to a net increase in working capital.
• Liquidity, measured as cash and cash equivalents plus available revolving credit, decreased to $480.5 million from $575.9 million at the end of the previous fiscal year.
• A $7.8 million non-cash loss on extinguishment of debt was incurred due to the Term Loan B refinancing.
• International Contract segment gross margin percentage declined by 150 basis points, impacted by incremental discounting, tariff-related costs, and unfavorable foreign currency translation.
• Global Retail segment operating earnings decreased by 73.6% due to increased operating expenses and a decline in gross margin percentage, driven by higher freight and distribution costs, and tariffs.

Risks

• Changes to U.S. and international trade policies, including new or increased tariffs and changing import/export regulations, which impact both the cost and availability of materials and components used to manufacture products as well as demand for products.
• Challenges in implementing the growth strategy and the possibility that the assumptions on which that strategy was built prove inaccurate.
• Consumer spending levels, which have a significant impact on 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, the continuation of the Russia-Ukraine war, and potential governmental responses to these events.
• Cybersecurity threats and risks.
• Public health crises, such as pandemics and epidemics, and governmental policies and actions to protect the health and safety of individuals or to maintain the functioning of national or global economies.
• Risks related to the additional debt incurred in connection with the acquisition of Knoll, including increased interest expense, the ability to comply with debt covenants and obligations, and limitations on certain business activities imposed by the credit agreement.
• 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, equipment, and sustainability goals. Management believes current 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 market financing availability. The company intends to repatriate $137.3 million of undistributed foreign earnings and remain indefinitely reinvested in the remaining $382.9 million of undistributed earnings outside the U.S.

Management Comments

• "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."

Industry Context

The company operates in the interior furnishings industry, serving residential, office, healthcare, and educational sectors. The mixed results, with strong sales but declining orders and backlog, suggest a complex market environment. While the company benefited from reduced integration costs and higher sales volumes, it faced headwinds from increased tariff-related costs and incremental discounting in some segments. The focus on extending debt maturities and securing additional liquidity through an accounts receivable securitization facility indicates a proactive approach to financial management amidst global economic uncertainties, including inflation and interest rate fluctuations, which are broader industry concerns.

Comparison to Industry Standards

• The filing does not provide specific comparable companies, projects, or results to assess the company's performance against global benchmarks. Therefore, a direct comparison to industry standards with specific entities is not possible based solely on the provided document.

Corporate Governance

Legal Proceedings

• No material changes in legal proceedings from those set forth in the Company's Annual Report on Form 10-K for the year ended May 31, 2025.

Stakeholder Impact

• **Shareholders:** Positive impact from return to profitability and increased diluted EPS, but tempered by declining orders and backlog. Debt refinancing provides stability, while share repurchase authorization offers potential for value return.
• **Employees:** Restructuring activities, including workforce reductions, have occurred in previous periods (2024 and 2025 plans), with remaining liabilities to be paid in fiscal 2026. No new significant workforce reductions were detailed for the current quarter beyond a facilities consolidation plan.
• **Customers:** Increased sales volumes across all segments indicate continued demand for products, but incremental discounting in International Contract suggests competitive pricing pressures.
• **Suppliers:** The supplier financing program allows certain participating suppliers to finance payment obligations, potentially impacting their cash flow and the company's payment terms.
• **Creditors:** Debt refinancing extended maturities, improving the company's debt profile and reducing near-term repayment pressure. The new accounts receivable securitization facility provides additional liquidity.

Next Steps

• Continue to fund capital purchases for facilities, equipment, and sustainability goals, with an estimated full-year spend of $120 million to $130 million for fiscal 2026.
• Manage and monitor the remaining liabilities for the 2025 restructuring plan ($2.1 million) and 2024 restructuring plan ($0.6 million), expected to be paid in fiscal year 2026.
• Utilize the newly established three-year accounts receivable securitization facility for general working capital purposes.
• Repatriate $137.3 million of undistributed foreign earnings.
• Continue to evaluate market conditions for potential share repurchases under the existing authorization of $174.2 million.

Key Dates

Recommendation

While MillerKnoll demonstrated strong net sales growth and a return to profitability, driven largely by reduced integration costs, the decline in new orders and backlog is a significant concern for future revenue. Gross margin compression due to tariffs and increased freight costs also presents headwinds. The proactive debt refinancing and new securitization facility are positive for liquidity and financial stability. However, the mixed operational signals suggest that while the company is managing its financial structure effectively, underlying demand trends warrant caution. A 'hold' recommendation reflects the balance between improved earnings and strategic financial moves against softening demand indicators and ongoing cost pressures.

Keywords

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