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KNL > SEC Filings for KNL > Form 10-Q on 12-May-2014All Recent SEC Filings

Show all filings for KNOLL INC

Form 10-Q for KNOLL INC


12-May-2014

Quarterly Report


ITEM 2. 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 unaudited condensed consolidated financial statements.

Forward-looking Statements

This Quarterly report on Form 10-Q contains forward-looking statements, principally in the sections entitled "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-Q 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 Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2013; 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 and commodity 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; 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-Q are expressly qualified in their entirety by the foregoing cautionary statements. Except as required under the Federal securities laws and 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.

Critical Accounting Policies

The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires us to make estimates and assumptions that affect the reported amounts and disclosures in the condensed consolidated financial statements. Actual results may differ from such estimates. On an ongoing basis, we review our accounting policies and procedures. A more detailed review of our critical accounting policies is contained in our Annual Report on Form 10-K for the year ended December 31, 2013.


Table of Contents

Overview

Net sales during the first quarter of 2014 were $229.3 million, an increase of $28.7 million, or 14.3%, over the first quarter of 2013. Office segment sales increased 6.3% during the first quarter of 2014 when compared with the prior year. Increased commercial sales drove the top line growth in the office segment. The Studio and Coverings segments, also experienced growth during the quarter. Studio segment sales increased 45.0% while the Coverings segment experienced 11.3% growth. The increase in sales in the Studio segment was mainly the result of the acquisition of HOLLY HUNTŪ during the first quarter of 2014. Excluding HOLLY HUNTŪ, sales were flat in the Studio segment during the first quarter of 2014. In the Coverings segment, both our leather and textiles businesses experienced growth during the quarter.

For the first quarter of 2014, gross profit as a percentage of net sales increased 160 basis points to 33.3% versus the comparable quarter of the prior year. The increase in gross margin from the first quarter of 2013 mainly resulted from favorable product mix, volume, and foreign exchange favorability. Gross margin also benefited from the acquisition of HOLLY HUNTŪ during the first quarter of 2014. These gains were partially offset by price deterioration in the Office Segment.

Operating expenses for the first quarter of 2014 were $64.7 million, or 28.2% of net sales, compared to $53.3 million, or 26.6% of net sales, for the first quarter of 2013. The increase in operating expenses during the first quarter of 2014 was in large part due to the addition of the operating expenses from HOLLY HUNTŪ as well as costs associated with a multi-day training event that occurred during the first quarter of 2014 in conjunction with our 75th anniversary.

Operating profit for the first quarter of 2014 was $11.8 million, an increase of 14.6% from the first quarter of 2013. During the first quarter of 2014, $0.6 million of acquisition-related expenses were included in operating profit. The increase in operating profit was mainly the result of the acquisition of HOLLY HUNTŪ, as well as increased profits in Europe in the Studio segment and all of the Coverings businesses.

Net earnings was $8.2 million during the first quarter of 2014 compared to $6.1 million during the first quarter of 2013. Diluted earnings per share attributable to Knoll, Inc. stockholders was $0.17 for the first quarter of 2014 and $0.13 for the first quarter of 2013.

During the first quarter of 2014, we completed the acquisition of HOLLY HUNTŪ. During the first quarter of 2014, our outstanding debt increased $95.0 million in order to fund the acquisition. During the first quarter of 2014, we paid a quarterly dividend of $5.7 million or $0.12 per share. Capital expenditures increased $1.2 million during the first quarter of 2014 to $7.8 million, when compared with the same period in the prior year. The increase in capital expenditures is mainly the result of investments in our supply chain transformation and information technology upgrades. Our supply chain transformation is allowing us to consolidate like processes, modernize technology and source strategically. These efforts have allowed us to reduce footprint, improve operating efficiencies and expand capability. To date, we have purchased and installed approximately $13.0 million of new capital equipment improving quality, capacity and flow, and we have consolidated six warehouses and cross-docking facilities to one logistics cross- dock hub.

In what is seasonally our weakest quarter of the year, we experienced growth on the top line across all segments.
This quarter the acquisition of HOLLY HUNTŪ became immediately accretive to both our top and bottom lines. The Office segment also began to show improvement on the commercial side of the business and we are now less exposed to the decline in government purchases. While the Office market has been secularly and cyclically challenged of late, we believe it has bottomed and are very encouraged by the progress we have made this quarter.


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Results of Operations

Comparison of Three Months ended March 31, 2014 and 2013

                                                              Three Months Ended
                                                      March 31, 2014      March 31, 2013
                                                                (in thousands)
Condensed Consolidated Statement of Operations Data:
Net sales                                            $       229,331     $       200,586
Gross profit                                                  76,475              63,627
Operating profit                                              11,825              10,294
Interest expense                                               1,671               1,495
Other (income) expense, net                                   (2,504 )            (1,291 )
Income tax expense                                             4,466               4,016
Net earnings                                                   8,192               6,074

Statistical and Other Data:
Sales growth from comparable prior year                         14.3 %               2.0 %
Gross profit margin                                             33.3 %              31.7 %

Net Sales

Net sales for the first quarter of 2014 were $229.3 million, an increase of $28.7 million, or 14.3%, from net sales of $200.6 million for the same period in the prior year. The increase in sales during the first quarter of 2014 was largely the result of of the acquisition of HOLLY HUNTŪ as well as increased sales from commercial clients in the Office segment.

A continued decline in our government business negatively impacted our sales performance, particularly in the Office segment, during the first three months of 2014. Over the past few years, we have lessened our exposure to this decline as government purchases now represent a lower portion of our overall sales. During the three months ended March 31, 2014 and 2013, approximately 11.1% and 13.0%, respectively, of our sales were to U.S., state, and local governmental agencies.

Gross Profit and Operating Profit

Gross profit for the first quarter of 2014 was $76.5 million, an increase of $12.9 million, or 20.3%, from gross profit of $63.6 million for the same period in the prior year. As a percentage of net sales, gross profit increased from 31.7% for the first quarter of 2013 to 33.3% for the first quarter of 2014. The increase in gross margin from the first quarter of 2013 mainly resulted from the acquisition of HOLLY HUNTŪ, favorable product mix, volume, and foreign exchange favorability. These gains were partially offset by price deterioration in the Office Segment.

Operating profit for the first quarter of 2014 was $11.8 million, an increase of $1.5 million, or 14.6%, from operating profit of $10.3 million for the same period in the prior year. Operating profit as a percentage of net sales increased from 5.1% in the first quarter of 2013 to 5.2% for the same period of 2014. The increase in operating profit during the three months ended March 31, 2014 was primarily driven by the acquisition of HOLLY HUNTŪ as well as increased profits in Europe in the Studio segment and all of the Coverings businesses. During the first quarter of 2014, operating profit in the Office segment was negatively impacted by costs associated with a multi-day training event in conjunction with our 75th anniversary.

Interest Expense

Interest expense for the three months ended March 31, 2014 and March 31, 2013 was $1.7 million and $1.5 million, respectively, an increase of $0.2 million from the same period in the prior year. The increase in interest expense is the result of our higher outstanding debt. The weighted-average interest rate for the first quarter of 2014 was 2.4%. The weighted-average interest rate for the same period of 2013 was 2.5%.


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Other (Income) Expense, net

Other (income) expense, net for the first quarter of 2014 and 2013 included ($2.5) million and ($1.3) million related to foreign exchange gains, respectively.

Income Tax Expense

The effective tax rate was 35.3% for the first quarter of 2014, as compared to 39.8% for the same period in 2013. 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.

Business Segment Analysis

                        Three Months Ended
                            March 31,
                        2014          2013
                          (in thousands)
NET SALES
Office               $  146,083    $ 137,480
Studio                   55,727       38,438
Coverings                27,521       24,668
Total                $  229,331    $ 200,586

OPERATING PROFIT (1)
Office               $    1,062    $   2,002
Studio                    5,492        4,142
Coverings                 5,271        4,150
Total                $   11,825    $  10,294

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

Office:

Net sales for the Office segment for the first quarter of 2014 were $146.1 million, an increase of $8.6 million, or 6.3%, when compared with the same period in 2013. Increased commercial shipments during the first quarter of 2014 led to the increase in sales in the Office segment. Office segment net sales for the three months ended March 31, 2014 were negatively impacted by $0.6 million due to changes in foreign exchange rates when compared to the same period in the prior year.

Operating profit for the first quarter of 2014 for the Office segment was $1.1 million, a decrease of $0.9 million, or 45.0%, when compared with the same period in 2013. The decrease in operating profit for the three months ended March 31, 2014 was mainly attributed to price deterioration and the costs associated with the Company's multi-day training event held in February 2014. As a percentage of net sales, the Office segment operating profit for the three months ended March 31, 2014 and 2013 was 0.7% and 1.5%, respectively.

Studio:

Net sales for the Studio segment for the first quarter of 2014 were $55.7 million, an increase of $17.3 million, or 45.0%, when compared with the same period in 2013. The increase in net sales for the Studio segment for the three months ended March 31, 2014 was mainly the result of the acquisition of HOLLY HUNTŪ and increased sales in Europe. Studio segment net sales for the three months ended March 31, 2014 were positively impacted by $1.1 million due to changes in foreign exchange rates when compared to the same period in the prior year.


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Operating profit for the first quarter of 2014 for the Studio segment was $5.5 million, an increase of $1.4 million, or 34.1%, when compared with the same period in 2013. As a percentage of net sales, the Studio segment operating profit was 9.9% for the first quarter ended March 31, 2014, down from 10.8% for the first quarter ended March 31, 2013. The increase in operating profit for the three months ended March 31, 2014 in the Studio segment was mainly the result of the acquisition of HOLLY HUNTŪ and increased profits in Europe.

Coverings:

Net sales for the first quarter of 2014 for the Coverings segment were $27.5 million, an increase of $2.8 million, or 11.3%, when compared with the same period in 2013. The increase in net sales for the Coverings segment for the three months ended March 31, 2014 was the result of increased sales by both our leather and textile businesses. Coverings segment net sales for the three months ended March 31, 2014 were minimally impacted by changes in foreign exchange rates compared to the same period in the prior year.

Operating profit for the first quarter of 2014 for the Coverings segment was $5.3 million, an increase of $1.1 million, or 26.2%, when compared with the same period of 2013. The increase in operating profit in the Coverings segment during the three months ended March 31, 2014 is the result of increased sales by each of our coverings businesses as well as moderating incremental investment spending. As a percentage of net sales, the Coverings segment operating profit was 19.2% for the first quarter ended March 31, 2014 and 16.8% for the first quarter ended March 31, 2013.

Liquidity and Capital Resources

The following table highlights certain key cash flows and capital information
pertinent to the discussion that follows:

                                                   Three Months Ended
                                                 March 31,     March 31,
                                                   2014          2013
                                                     (in thousands)
Cash provided by (used in) operating activities $  12,871     $  (4,133 )
Capital expenditures                               (7,814 )      (6,626 )
Purchase of a business, net of cash acquired      (93,349 )           -
Cash used in investing activities                (101,478 )      (6,901 )
Purchase of common stock for treasury              (3,691 )      (2,331 )
Proceeds from revolving credit facility           185,000        63,000
Repayment of revolving credit facility            (90,000 )     (63,000 )
Payment of dividends                               (5,679 )      (5,629 )
Proceeds from the issuance of common stock             36         2,134
Cash provided by (used in) financing activities    85,666        (5,643 )

Historically, we have carried significant amounts of debt, and cash generated by operating activities has been used to fund working capital, capital expenditures, repurchase shares, pay quarterly dividends and make payments of principal and interest on our indebtedness. Our capital expenditures are typically for new product tooling and manufacturing equipment. These capital expenditures support new products and continuous improvements in our manufacturing processes. In addition, continued expenditures related to our technology infrastructure upgrades with the implementation of a new enterprise resource planning system and investments and initiatives related to our supply chain transformation increased capital spending during the first quarter of 2014 when compared with the same period in the prior year.

In February 2013, we announced a three-year plan of strategic investments and initiatives intended to enable us to achieve our longer-term revenue and profitability goals. These investments will increase capital spending in 2014 when compared with the prior year.

Net cash provided by operations was $12.9 million, of which $11.8 million was provided by net income plus non-cash items, offset by $1.1 million of favorable changes in operating assets and liabilities. During the first quarter of 2013, net cash used in operations was $4.1 million, of which $11.9 million was provided by net income plus non-cash items, offset by $16.0 million of unfavorable changes in assets and liabilities.


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For the three months ended March 31, 2014, we used available cash, including $12.9 million of net cash from operating activities, to fund $7.8 million in capital expenditures, fund dividend payments to shareholders totaling $5.7 million, and fund working capital. This quarter we also increased the indebtedness under our revolving credit facility by $95.0 million in order to fund the acquisition of HOLLY HUNTŪ.

For the three months ended March 31, 2013, we used available cash to fund $6.6 million in capital expenditures, fund dividend payments to shareholders totaling $5.6 million, repurchase $2.3 million of common stock for treasury, and fund working capital.

Cash used in investing activities was $101.5 million for the three months ended March 31, 2014 and $6.9 million for the same period in 2013. $93.3 million was used to purchase HOLLY HUNTŪ, net of cash acquired. Capital expenditures during the first quarter of 2014 were $7.8 million compared to $6.6 million during the same period in the prior year.

We use our revolving credit facility in the ordinary course of business to fund our working capital needs and, at times, make significant borrowings and repayments under the facility depending on our cash needs and availability at such time. As of March 31, 2014 and December 31, 2013, there was $268.0 million and $173.0 million, respectively, outstanding under the facility. Borrowings under the revolving credit facility may be repaid at any time, but no later than February 3, 2017.

Our revolving credit facility requires that we comply with two financial covenants: our consolidated leverage ratio, defined as the ratio of total indebtedness to consolidated EBITDA (as defined in our credit agreement) for a period of four fiscal quarters, cannot exceed 4 to 1, and our consolidated interest coverage ratio, defined as the ratio of our consolidated EBITDA (as defined in our credit agreement) for a period of four fiscal quarters to our consolidated interest expense, must be a minimum of 3 to 1. We are also required to comply with various other affirmative and negative covenants including, without limitation, covenants that prevent or restrict our ability to pay dividends, engage in certain mergers or acquisitions, make certain investments or loans, incur future indebtedness, make significant capital expenditures, engage in sale-leaseback transactions, alter our capital structure or line of business, prepay subordinated indebtedness, engage in certain transactions with affiliates and sell stock or assets.

We are currently in compliance with all of the covenants and conditions under our credit facility. We believe that existing cash balances and internally generated cash flows, together with borrowings available under our revolving credit facility, will be sufficient to fund normal working capital needs, capital spending requirements, debt service requirements and dividend payments for at least the next twelve months. However, because of the financial covenants mentioned above, our capacity under our revolving credit facility could be reduced if our trailing consolidated EBITDA (as defined by our credit agreement) would decline. Future principal debt payments may be paid out of cash flows from operations, from future refinancing of our debt or from equity issuances. However, our ability to make scheduled payments of principal, to pay interest on or to refinance our indebtedness, to satisfy our other debt obligations and to pay dividends to stockholders will depend upon our future operating performance, which will be affected by general economic, financial, competitive, legislative, regulatory, business and other factors beyond our control.


Table of Contents

Contractual Obligations

Contractual obligations associated with our ongoing business will result in cash
payments in future periods.  A table summarizing the amounts and timing of these
future cash payments was previously provided in the Company's Form 10-K filing
for the fiscal year ended December 31, 2013. An updated version of this table as
of March 31, 2014 is provided below.
The following table summarizes our contractual cash obligations as of March 31,
2014 (in thousands):
                                                   Payments due by period
                         Less than         1 to 3          3 to 5         More than
                           1 year           years           years          5 years           Total
Long-term debt         $      5,107     $     8,968     $   268,476                -     $   282,551
Operating leases             19,971          43,937          35,377           41,370         140,655
Purchase commitments         11,231             316               -                -          11,547
Post-retirement
benefit plan
obligations(a)                1,155               -               -                -           1,155
Total                  $     37,464     $    53,221     $   303,853     $     41,370     $   435,908


(a)Due to the uncertainty of future cash outflows, contributions to other post-retirement benefit plans subsequent to 2014 have been excluded from the table above. (*) Due to the uncertainty of future cash outflows, uncertain tax positions have been excluded from the table above. Contractual obligations for long-term debt include principal and interest payments. Interest has been included at the variable rate in effect as of March 31, 2014, as applicable.

Environmental Matters

Our past and present business operations and the past and present ownership and operation of manufacturing plants on real property are subject to extensive and changing federal, state, local and foreign environmental laws and regulations, including those relating to discharges to air, water and land, the handling and disposal of solid and hazardous waste and the cleanup of properties affected by hazardous substances. As a result, we are involved from time-to-time in administrative and judicial proceedings and inquiries relating to environmental matters and could become subject to fines or penalties related thereto. We cannot predict what environmental legislation or regulations will be enacted in the future, how existing or future laws or regulations will be administered or interpreted or what environmental conditions may be found to exist. Compliance with more stringent laws or regulations, or stricter interpretation of existing laws, may require additional expenditures by us, some of which may be material. We have been identified as a potentially responsible party pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA") for remediation costs associated with waste disposal sites that we previously used. The remediation costs and our allocated share at some of these CERCLA sites are unknown. We may also be subject to claims for personal injury or contribution relating to CERCLA sites. We reserve amounts for such matters when expenditures are probable and reasonably estimable.

Off-Balance Sheet Arrangements

We do not currently have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special-purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving . . .

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