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KNL > SEC Filings for KNL > Form 10-K on 3-Mar-2014All Recent SEC Filings

Show all filings for KNOLL INC

Form 10-K for KNOLL INC


3-Mar-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of operations provides an account of our financial performance and financial condition that should be read in conjunction with the accompanying audited consolidated financial statements.
Forward-looking Statements
This annual report on Form 10-K contains forward-looking statements, principally in the sections entitled "Business," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Quantitative and Qualitative Disclosures About Market Risk." Statements and financial discussion and analysis contained in this Form 10-K that are not historical facts are forward-looking statements. These statements discuss goals, intentions and expectations as to future trends, plans, events, results of operations or financial condition, or state other information relating to us, based on our current beliefs as well as assumptions made by us and information currently available to us. Forward-looking statements generally will be accompanied by words such as "anticipate," "believe," "could," "estimate," "expect," "forecast," "intend," "may," "possible," "potential," "predict," "project," or other similar words, phrases or expressions. This includes, without limitation, our statements and expectations regarding any current or future recovery in our industry and publicly announced plans for increased capital and investment spending to achieve our long-term revenue and profitability growth goals, and our expectations with respect to leverage. Although we believe these forward-looking statements are reasonable, they are based upon a number of assumptions concerning future conditions, any or all of which may ultimately prove to be inaccurate. Important factors that could cause actual results to differ materially from the forward-looking statements include, without limitation: the risks described in Item 1A and in Item 7A of this annual report on Form 10-K; changes in the financial stability of our clients or the overall economic environment, resulting in decreased corporate spending and service sector employment; changes in relationships with clients; the mix of products sold and of clients purchasing our products; the success of new technology initiatives; changes in business strategies and decisions; competition from our competitors; our ability to recruit and retain an experienced management team; changes in raw material prices and availability; restrictions on government spending resulting in fewer sales to the U.S. government, one of our largest customers; our debt restrictions on spending; our ability to protect our patents, copyrights and trademarks; our reliance on furniture dealers to produce sales; lawsuits arising from patents, copyrights and trademark infringements; violations of environmental laws and regulations; potential labor disruptions; adequacy of our insurance policies; the availability of future capital and the cost of borrowing; the overall strength and stability of our dealers, suppliers, and customers; access to necessary capital; our ability to successfully integrate acquired businesses; the success of our design and implementation of a new enterprise resource planning system; and currency rate fluctuations. The factors identified above are believed to be important factors (but not necessarily all of the important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement. Unpredictable or unknown factors could also have material adverse effects on us. All forward-looking statements included in this Form 10-K are expressly qualified in their entirety by the foregoing cautionary statements. Except as required under the Federal securities laws and the rules and regulations of the SEC, we undertake no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise.
Overview
We design, manufacture, market and sell furnishings and accessories, textiles, fine leathers, and felt, for the workplace and home. Our commitment to innovation and modern design has yielded a comprehensive portfolio of products and a brand recognized for high quality and a sophisticated image. Our products are targeted at the middle to upper end of the market and are sold primarily in North America and Europe through a direct sales force and a broad network of independent dealers and retailers.
We operate under a management philosophy that incorporates a collaborative culture, client-driven processes and a lean, agile operating structure. Our employees are performance-driven and motivated by a variable incentive compensation system and broad-based equity ownership in the company. In 2013, according to our industry trade association, The Business and Institutional Furniture Manufacturer's Association, or BIFMA, industry sales and orders grew modestly 0.9% and 1.9%, respectively, when compared with 2012. During 2013, we believe continued uncertainty over the economy and modest job growth led to mediocre improvement in the overall office furniture industry. During 2013, our sales decreased 2.8% when compared with the prior year. The decline in sales for 2013 can be mainly attributed to decreased purchases from the federal government as our sales to commercial clients grew during 2013.


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During 2013, we generated operating profit of $41.1 million, or 4.8% of net sales, compared to operating profit of $87.9 million, or 9.9% of net sales, during 2012. Operating profit for 2013 includes restructuring charges of $5.7 million and an $8.9 million intangible asset impairment charge. During the fourth quarter of 2013, we announced a plan to reduce headcount in the Office segment, as part of our supply transformation activities, as well as headcount reductions in the Studio Segment in Europe, which were associated with factory overhead consolidations. For further information regarding these restructuring charges see Note 21 of the consolidated financial statements in this annual report on Form 10-K. In addition, during 2013, our annual impairment testing procedures indicated a decline in the fair value of the Edelman tradename intangible asset below its respective carrying value. This resulted in the Edelman tradename being written down $8.9 million. For further information regarding this write-down see Note 8 of the consolidated financial statements in this annual report on Form 10-K.
Including the above noted charges, during 2013, we generated net income of $23.1 million, or $0.49 diluted earnings per share, compared to $50.0 million, or $1.06 diluted earnings per share, in 2012.
We continued to aggressively manage our balance sheet during 2013. As of December 31, 2013, our outstanding debt was $173.0 million. This represents an additional $20.0 million reduction in our debt outstanding since December 31, 2012. Since the end of 2007, we have reduced our outstanding debt by $195.4 million and we remain in compliance with all of our bank covenants. At December 31, 2013, we had $12.0 million of cash on hand. As mentioned in Note 24, we acquired Holly Hunt, Enterprises, Inc. on February 3, 2014. As part of the acquisition, we increased our debt by approximately $95 million. During 2013, we used free cash to pay dividends to our shareholders totaling $22.5 million or $0.48 per share. During 2013, we also spent $29.1 million on capital expenditures. This represents an increase of $12.6 million when compared with $16.5 million in 2012. The increases in capital spending can be mainly attributed to our newly relocated New York showroom at 1330 Avenue of the Americas, increased spending associated with our technology infrastructure upgrades with the implementation of a new enterprise resource planning system, and costs associated with our previously announced program of strategic investments and initiatives to meet our longer-term profitability goals. We expect sales to increase gradually as we move through 2014. BIFMA is currently forecasting 4.3% and 3.2% growth, respectively, in sales and orders for 2014. We expect the Office segment will begin to grow in 2014 as we are now significantly less exposed to decreases in government spending. Our recently announced acquisition of Holly Hunt Enterprises in the beginning of 2014 will also positively impact Studio segment sales. This acquisition furthers our broader strategic plan and desire to position Knoll as the go to resource for high-design workplaces and homes including the commercial contract, decorator to the trade and direct to consumer markets. This acquisition complements our existing businesses and increases the mix of revenue that we get from higher margin higher design residential and specialty sales. See Note 24 of the consolidated financial statements in this annual report on Form 10-K for further information regarding this acquisition. In addition, during 2014, we expect to realize some of the benefits from our previously announced program of strategic investments and initiatives.
Segment Reporting
Our three reporting segments consist of: (1) Office, which includes our systems, seating, storage, tables, desks and KnollExtra® ergonomic accessories as well as the international sales of our North American Office products; (2) Studio, which includes KnollStudio®, Knoll Europe (where over half our sales consist of KnollStudio® products), Richard Schultz® Design and, prospectively, Holly Hunt Enterprises, Inc.; and (3) Coverings, which includes KnollTextiles®, Edelman® Leather, and Spinneybeck® Leather (including Filzfelt®). We sometimes refer to our Studio and Coverings segments collectively as our specialty businesses. These businesses generally provide our most profitable sales and we will continue our efforts to grow these segments. See Note 19 of our consolidated financial statements contained in this annual report on Form 10-K for further information regarding the business segments.


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Results of Operations

Years ended December 31, 2012 and 2013

                                                                                  Twelve                                                                         Twelve
                                      Three Months Ended                       Months Ended                           Three Months Ended                      Months Ended
                   March 31,     June 30,     September 30,    December 31,    December 31,         March 31,    June 30,    September 30,    December 31,    December 31,
                      2012         2012            2012            2012            2012               2013         2013           2013            2013            2013
                                                                           (in thousands, except statistical data)
                                                                                         (unaudited)
Consolidated Statements of Operations and Comprehensive Income Data:
Sales             $ 196,662    $  221,018    $     219,794    $     250,026   $    887,499    (1 ) $ 200,586   $ 214,312    $     216,898    $    230,872    $    862,668
Gross profit         63,053        74,407           74,216           82,675        294,350    (1 )    63,627      69,881           72,339          74,429         280,275    (1 )
Operating profit     15,452        20,803           23,522           28,126         87,901    (1 )    10,294      12,408           17,051           1,308          41,060    (1 )
Interest expense      1,506         1,637            1,635            1,572          6,350             1,495       1,517            1,484           1,445           5,941
Other (income)
expense, net          2,200        (1,262 )          2,786             (509 )        3,215    (1 )    (1,291 )    (2,206 )          2,224          (2,157 )        (3,430 )
Income tax
expense               4,489         7,373            6,904            9,570         28,335             4,016       5,209            4,793           1,386          15,403    (1 )
Net income        $   7,257    $   13,055    $      12,197    $      17,493   $     50,001    (1 ) $   6,074   $   7,888    $       8,550    $        634    $     23,146
Statistical and
Other Data:
Sales growth from
comparable prior
year                  (11.0 )%       (7.4 )%          (8.2 )%          12.0 %         (3.8 )%            2.0 %      (3.0 )%          (1.3 )%         (7.7 )%         (2.8 )%
Gross profit %         32.1  %       33.7  %          33.8  %          33.1 %         33.2  %           31.7 %      32.6  %          33.4  %         32.2  %         32.5  %


(1) Results do not add due to rounding

Sales
Sales for 2013 were $862.7 million, a decrease of $24.8 million, or 2.8%, from sales of $887.5 million for 2012. In 2013, systems continued to represent the largest percentage of our overall sales. However, this percentage continues to decline year-over-year as our high-margin specialty businesses are representing a larger portion of our overall sales. Geographically, sales in Europe increased modestly during 2013 while sales in North America decreased modestly. Sales to governmental entities and agencies continued to represent a large portion of our overall sales in 2013. However, these sales declined on a year-over-year basis during 2013. This decline was a significant factor in our overall lower sales for 2013. Approximately 13.0% of our 2013 sales were to federal, state and local governmental entities and related agencies as compared to 16.2% in 2012.
Gross Profit and Operating Profit
Gross profit for 2013 was $280.3 million, a decrease of $14.1 million, or 4.8%, from gross profit of $294.4 million in 2012. Operating profit for 2013 was $41.1 million, a decrease of $46.8 million, or 53.3%, from operating profit of $87.9 million for 2012.
As a percentage of sales, gross profit decreased from 33.2% for 2012 to 32.5% for 2013. The decrease in gross profit as a percent of sales during the year was mainly the result of price erosion in the Office segment as well as lower absorption of our fixed costs as a result of our lower sales. Operating profit as a percentage of sales decreased from 9.9% in 2012 to 4.8% in 2013. Operating profit for 2013 includes $5.7 million of restructuring charges and an $8.9 million intangible asset impairment charge related to the write-down of the Edelman tradename.
Selling, general, and administrative expenses for 2013 were $224.6 million, or 26.0% of sales, compared to $206.4 million, or 23.3% of sales, for 2012. The increase in operating expenses during 2013 was in large part due to increased spending associated with our announced programs of strategic investments and initiatives to achieve our longer-term revenue and margin objectives, which were partially offset by lower incentive compensation.


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Interest Expense
Interest expense for 2013 was $5.9 million, a decrease of $0.5 million from interest expense of $6.4 million for 2012. The decrease in interest expense for the periods noted above is mainly due to our lower outstanding debt. The annualized weighted-average interest rate for 2013 and 2012 was 2.6% and 2.4%, respectively.
Other (Income) Expense, net
Other (income) expense in 2013 consisted of income related to $3.5 million of foreign exchange gains offset by $0.1 million of miscellaneous expense. Other (income) expense in 2012 consisted of expense related to $2.8 million of foreign exchange losses, expense of $0.5 million related to the write-off of deferred financing fees in conjunction with our new senior credit facility completed in February 2012, offset by $0.1 million of miscellaneous income. Income Tax Expense
The mix of pretax income and the varying effective tax rates in the countries in which we operate directly affects our consolidated effective tax rate. The effective tax rate was 40.0% for 2013 compared to 36.2% for 2012. Our effective tax rate for 2012 was lower as a result of a reduction in our unrecognized tax benefits.

Business Segment Analysis

                                                  2013         2012
SALES
Office                                         $ 599,131    $ 633,321
Studio                                           154,499      147,550
Coverings                                        109,038      106,628
Knoll, Inc.                                    $ 862,668    $ 887,499
OPERATING PROFIT
Office                                         $  16,110    $  48,639
Studio                                            18,550       21,786
Coverings                                         20,996       17,476
Subtotal                                          55,656       87,901
Restructuring Charges - Office                     2,721            -
Restructuring Charges - Studio                     2,975            -
Intangible Asset Impairment Charge - Coverings     8,900            -
Knoll, Inc.(1)                                 $  41,060    $  87,901


(1) The Company does not allocate interest expense or other (income) expense, net to the reportable segments.

Net sales for the Office segment in 2013 were $599.1 million, a decrease of $34.2 million, or 5.4%, when compared with 2012. This decrease in the Office Segment for the year was mainly the result of lower sales to government agencies. Sales to commercial clients grew during 2013; however, this growth was not enough to offset the decline in sales to government agencies. Office segment sales in 2013 were negatively impacted by $1.1 million due to changes in foreign exchange rates when compared to 2012. Excluding the impact of $2.7 million of restructuring charges, operating profit for the Office segment was $16.1 million in 2013, a decrease of $32.5 million, or 66.9%, when compared with 2012. As a percent of net sales, excluding restructuring charges, the Office segment operating profit was 2.7% for the year ended December 31, 2013 and 7.7% for the year ended December 31, 2012.
Net sales for the Studio segment in 2013 were $154.5 million, an increase of $6.9 million, or 4.7%, when compared with 2012. Sales growth in North America outpaced Europe within the Studio segment during 2013. Studio segment sales in 2013 were positively impacted by $0.8 million due to changes in foreign exchange rates when compared to 2012. Excluding the impact of $3.0 million of restructuring charges, operating profit for the Studio segment was $18.6 million, a decrease of $3.2 million, or 14.9%, when compared with 2012. As a percentage of net sales, excluding restructuring charges, the Studio segment operating profit was 12.0% for the year ended December 31, 2013 and 14.8% for the year ended December 31, 2012.


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Net sales for the Coverings segment in 2013 were $109.0 million, an increase of $2.4 million, or 2.3%, when compared with 2012. Increased sales of our Textiles products was the main cause of this increase. Coverings segment sales in 2013 were positively impacted by $0.1 million due to changes in foreign exchange rates when compared to 2012. Excluding the $8.9 million intangible asset impairment charge, operating profit for the Coverings segment was $21.0 million, an increase of $3.5 million, or 20.1%, when compared to 2012. As a percentage of net sales, excluding the impairment charge, the Coverings segment operating profit was 19.3% for the year ended December 31, 2013 and 16.4% for the year ended December 31, 2012.
Years ended December 31, 2011 and 2012

                                                                              Twelve                                                                          Twelve
                                    Three Months Ended                     Months Ended                            Three Months Ended                      Months Ended
                  March 31,   June 30,    September 30,    December 31,    December 31,         March 31,     June 30,    September 30,    December 31,    December 31,
                    2011        2011           2011            2011            2011                2012         2012           2012            2012            2012
                                                                         (in thousands, except statistical data)
                                                                                       (unaudited)
Consolidated Statement of Operations Data:
Sales            $ 220,858   $ 238,650   $      239,543   $    223,148    $     922,200   (1 ) $ 196,662    $ 221,018    $     219,794    $     250,026   $    887,499    (1 )
Gross profit        68,401      76,493           78,851         70,650          294,397   (1 )    63,053       74,407           74,216           82,675        294,350    (1 )
Operating income    20,914      23,325           25,015         27,814           97,071   (1 )    15,452       20,803           23,522           28,126         87,901    (1 )
Interest expense     4,017       3,372            1,226          1,138            9,753            1,506        1,637            1,635            1,572          6,350
Other (income)
expense, net         2,328         275           (4,077 )          (35 )         (1,508 ) (1 )     2,200       (1,262 )          2,786             (509 )        3,215
Income tax
expense              5,367       6,703            9,477          9,268           30,815            4,489        7,373            6,904            9,570         28,335    (1 )
Net income       $   9,202   $  12,975   $       18,389   $     17,443    $      58,011   (1 ) $   7,257    $  13,055    $      12,197    $      17,493   $     50,001    (1 )
Statistical and Other Data:
Sales growth
from comparable
prior year            26.0 %      24.1 %           18.5 %         (6.9 )%          13.9 %          (11.0 )%      (7.4 )%          (8.2 )%          12.0 %         (3.8 )%
Gross profit
margin                31.0 %      32.1 %           32.9 %         31.7  %          31.9 %           32.1  %      33.7  %          33.8  %          33.1 %         33.2  %


(1) Results do not add due to rounding

Sales
Sales for 2012 were $887.5 million, a decrease of $34.7 million, or 3.8%, from sales of $922.2 million for 2011. In 2012, systems continued to represent the largest percentage of our overall sales. Geographically, our European sales declined 9.9% compared to North America which declined 3.2%. The decline in European sales was driven primarily by the overall poor economic conditions in Europe. From a product perspective, we experienced our largest percentage sales decline in seating during 2012. We believe these sales declines were driven primarily by a reduction in government spending and reduced purchases by financial services clients in 2012. Despite the reduced seating sales, our Generation family of products grew in 2012 and continued to gain market share.

Sales to governmental entities and agencies continued to represent a large portion of our overall sales in 2012. However, these sales declined on a year-over-year basis during 2012. This decline was a significant factor in our overall lower sales for 2012. Approximately 16.2% of our 2012 sales were to federal, state and local governmental entities and related agencies as compared to 19.5% in 2011.
Gross Profit and Operating Profit
Gross profit for 2012 and 2011 was $294.4 million. Operating profit for 2012 was $87.9 million, a decrease of $9.2 million, or 9.5%, from operating profit of $97.1 million for 2011. Operating profit during the fourth quarter of 2011 includes a $5.4 million curtailment benefit primarily associated with the modification of the Company's post-retirement medical benefits.


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As a percentage of sales, gross profit increased from 31.9% for 2011 to 33.2% for 2012. The largest contributors to this increase were a more profitable mix in our business, as we saw government shipments, which are generally contracted at higher discount rates, make up a smaller portion of our overall sales, and continuous improvement projects in our factories. Operating profit as a percentage of sales decreased from 10.5% in 2011 to 9.9% in 2012. Operating profit for 2011 includes a $5.4 million curtailment benefit primarily associated with the modification of the Company's post-retirement medical benefits. Selling, general, and administrative expenses for 2012 were $206.4 million, or 23.3% of sales, compared to $202.1 million, or 21.9% of sales, for 2011. The increase in operating expenses during 2012 was in large part due to increased spending on growth initiative programs in our Studio and Coverings segments as well as technology infrastructure upgrades primarily associated with the design and implementation of a new enterprise resource planning system. Interest Expense
Interest expense for 2012 was $6.4 million, a decrease of $3.4 million from interest expense of $9.8 million for 2011. The decrease in interest expense for the periods noted above is mainly due to our lower outstanding debt and the expiration of two interest rate swap agreements that expired on June 9, 2011. See Note 13 of the consolidated financial statements included in this annual report on Form 10-K for further information regarding the interest rate swaps. The annualized weighted-average interest rate for 2012 was 2.4%. Taking into account payments on our interest rate swap agreements, the annualized weighted-average interest rate for 2011 was 3.6%. Other (Income) Expense, net
Other (income) expense in 2012 consisted of expense related to $2.8 million of foreign exchange losses, expense of $0.5 million related to the write-off of deferred financing fees in conjunction with our new senior credit facility completed in February of 2012, offset by $0.1 million of miscellaneous income. Other (income) expense in 2011 consisted of income of $2.7 million of foreign exchange gains, $0.4 million of miscellaneous income, offset by $1.6 million of miscellaneous expense related to a negative judicial ruling. Income Tax Expense
The mix of pretax income and the varying effective tax rates in the countries in which we operate directly affects our consolidated effective tax rate. The effective tax rate was 36.2% for 2012 compared to 34.7% for 2011. Our effective tax rate is dependent upon the mix of pretax income in the countries in which we operate.

Results of Operations
Business Segment Analysis
                                                      2012         2011
SALES
Office                                             $ 633,321    $ 664,132
Studio                                               147,550      152,724
Coverings                                            106,628      105,344
Knoll, Inc.                                        $ 887,499    $ 922,200
OPERATING PROFIT
Office                                             $  48,639    $  46,614
Studio                                                21,786       23,022
Coverings                                             17,476       22,686
Subtotal                                              87,901       92,322
Restructuring and other charges primarily Office           -          696
. . .
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