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KNL > SEC Filings for KNL > Form 10-Q on 11-Aug-2014All Recent SEC Filings

Show all filings for KNOLL INC

Form 10-Q for KNOLL INC


11-Aug-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.


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Overview

Net sales during the second quarter of 2014 were $265.8 million, an increase of $51.5 million, or 24.0%, over the second quarter of 2013. Office segment sales increased 7.4% during the second quarter of 2014 when compared with the prior year. Increased sales in the Office segment were the result of improved government and commercial sales year-over-year. Studio segment sales increased 105.1%, while the Coverings segment experienced 4.8% 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 as well as organic growth in Europe and North America.

For the second quarter of 2014, gross profit as a percentage of net sales increased 400 basis points to 36.6% versus the comparable quarter of the prior year. The increase in gross margin from the second quarter of 2013 mainly resulted from the mix of higher margin HOLLY HUNT sales as well as better absorption and improved costs in our Office segment.

Operating expenses for the second quarter of 2014 were $75.0 million, or 28.2% of net sales, compared to $57.5 million, or 26.8% of net sales, for the second quarter of 2013. The increase in operating expenses was attributable to the addition of operating expenses associated with HOLLY HUNTŪ and greater commission and incentive compensation expenses incurred as a result of higher sales and profits.

Operating profit for the second quarter of 2014 was $22.2 million, an increase of $9.8 million, or 79.0%, when compared to the same period in 2013. Operating profit for the Office segment was $6.4 million in the second quarter of 2014, an increase of $3.0 million, or 88.2% when compared with the second quarter of 2013. The increase in operating profit in the Office Segment was attributable to increased sales, improved pricing, and benefits from our supply chain transformation efforts. Operating profit for the Studio segment was $9.5 million, an increase of $6.2 million, or 187.9% when compared with the second quarter of 2013. The increase in operating profit in the Studio segment was mainly the result of the acquisition of HOLLY HUNTŪ during the first quarter of 2014 as well as organic sales growth in Europe and North America. Operating profit for the Coverings segment was $6.3 million, an increase of $0.6 million, or 10.5% when compared to the second quarter of 2013.

During the second quarter of 2014 and 2013, other (income) expense included a foreign exchange loss and gain of $2.4 million and ($2.3) million, respectively. Other (income) expense for the second quarter of 2014 also included $0.3 million of expense for the write-off of deferred financing fees related to the refinance of the new credit facility, which runs through May 2019.

Net earnings was $10.8 million during the second quarter of 2014 compared to $7.9 million during the second quarter of 2013. Diluted earnings per share attributable to Knoll, Inc. stockholders was $0.23 for the second quarter of 2014 and $0.17 for the second quarter of 2013.


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Results of Operations

Comparison of Three and Six Months ended June 30, 2014 and 2013

                                             Three Months Ended                     Six Months Ended
                                      June 30, 2014      June 30, 2013      June 30, 2014      June 30, 2013
                                                                  (in thousands)
Condensed Consolidated Statement of
Operations Data:
Net sales                            $      265,797     $     214,312      $      495,128     $     414,898
Gross profit                                 97,203            69,881             173,679           133,508
Operating profit                             22,195            12,408              34,021            22,702
Interest expense                              1,944             1,517               3,615             3,012
Other (income) expense, net                   2,700            (2,206 )               196            (3,497 )
Income tax expense                            6,712             5,209              11,178             9,225
Net earnings                                 10,839             7,888              19,032            13,962

Statistical and Other Data:
Sales growth from comparable prior
year                                           24.0 %            (3.0 )%             19.3 %            (0.7 )%
Gross profit margin                            36.6 %            32.6  %             35.1 %            32.2  %

Net Sales

Net sales for the second quarter of 2014 were $265.8 million, an increase of $51.5 million, or 24.0%, from net sales of $214.3 million for the same period in the prior year. Net sales for the six months ended June 30, 2014 were $495.1 million, an increase of $80.2 million, or 19.3%, from net sales of $414.9 million for the same period in the prior year. The increase in sales during the three and six months ended June 30, 2014 was largely the result of of the acquisition of HOLLY HUNTŪ, increased governmental sales in the Office segment, and organic growth in the Studio segment in Europe and North America. During the six months ended June 30, 2014 and 2013, approximately 12.0% and 13.3%, respectively, of our sales were to U.S., state, and local governmental agencies.

Gross Profit and Operating Profit

Gross profit for the second quarter of 2014 was $97.2 million, an increase of $27.3 million or 39.1%, from gross profit of $69.9 million for the same period in the prior year. Gross profit for the six months ended June 30, 2014 was $173.7 million, an increase of $40.2 million, or 30.1%, from gross profit of $133.5 million for the same period in the prior year. As a percentage of net sales, gross profit increased from 32.6% for the second quarter of 2013 to 36.6% for the second quarter of 2014. As a percentage of net sales, gross profit increased from 32.2% for the six months ended June 30, 2013 to 35.1% for the six months ended ended June 30, 2014. The increase in gross margin during the three and six months ended June 30, 2014 mainly resulted from favorable product mix, higher sales volume, and improved costs in our Office segment.

Operating profit for the second quarter of 2014 was $22.2 million, an increase of $9.8 million, or 79.0%, from operating profit of $12.4 million for the same period in the prior year. Operating profit for the six months ended June 30, 2014 was $34.0 million, an increase of $11.3 million, or 49.8%, from operating profit of $22.7 million for the same period in the prior year. Operating profit as a percentage of net sales increased from 5.8% in the second quarter of 2013 to 8.4% for the same period of 2014. Operating profit as a percentage of net sales increased from 5.5% for the six months ended June 30, 2013 to 6.9% in the same period for 2014. All segments experienced an increase in operating profit for the three and six months ended June 30, 2014; the overall increase was primarily driven by the acquisition of HOLLY HUNTŪ, increased profits in Europe in the Studio segment, and benefits from our supply chain transformation efforts.


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Interest Expense

Interest expense for the second quarter of 2014 was $1.9 million, an increase of $0.4 million from $1.5 million for the same period in the prior year. Interest expense for six months ended June 30, 2014 was $3.6 million, an increase of $0.6 million from $3.0 million for the same period in the prior year. The increase in interest expense is the result of additional debt incurred to purchase HOLLY HUNTŪ. The weighted-average interest rate for the second quarter of 2014 was 2.5%. The weighted-average interest rate for the same period of 2013 was 2.6%. The weighted-average interest rate for the six months ended June 30, 2014 and June 30, 2013 was 2.4% and 2.6%, respectively.

Other (Income) Expense, net

Other (income) expense for the second quarter of 2014 was $2.7 million, which included $2.4 million of foreign exchange losses and the write-off of $0.3 million of deferred financing fees. Other (income) expense for the second quarter of 2013 was ($2.2) million, which included ($2.3) million of foreign exchange gains, offset by $0.1 million of miscellaneous expense. Other (income) expense for the six months ended June 30, 2014 was $0.2 million, which included $0.3 million related to the write-off of deferred financing fees, offset by $0.1 million of miscellaneous income. Other (income) expense for the six months ended June 30, 2013 consisted of income of ($3.5) million related to foreign exchange gains.

Income Tax Expense

The effective tax rate was 38.2% for the second quarter of 2014, as compared to 39.8% for the same period in 2013. The effective tax rate was 37.0% for the six months ended June 30, 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

The below table categorizes certain financial information into our Office,
Studio, and Coverings segments for the three and six months ended June 30, 2014
and 2013:
                        Three Months Ended         Six Months Ended
                             June 30,                  June 30,
                        2014          2013         2014         2013
                                       (in thousands)
NET SALES
Office               $  159,100    $ 148,070    $ 305,183    $ 285,550
Studio                   76,308       37,231      132,035       75,669
Coverings                30,389       29,011       57,910       53,679
Total                $  265,797    $ 214,312    $ 495,128    $ 414,898

OPERATING PROFIT (1)
Office (2)           $    6,402    $   3,432    $   7,465    $   5,434
Studio                    9,463        3,274       14,955        7,416
Coverings                 6,330        5,702       11,601        9,852
Total                $   22,195    $  12,408    $  34,021    $  22,702

(1) The Company does not allocate interest expense or other (income) expense, net to the reportable segments.
(2) Office operating profit includes $0.2 million of restructuring expenses incurred during the three months ended June 30, 2014. These restructuring expenses were incurred to better utilize our manufacturing capacity.


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Office:

Net sales for the Office segment for the second quarter of 2014 were $159.1 million, an increase of $11.0 million, or 7.4%, when compared with the same period in 2013. Net sales for the Office segment for the six months ended June 30, 2014 were $305.2 million, an increase of $19.6 million, or 6.9%, when compared with the same period in 2013. Increased sales in the Office segment were the result of improved government and commercial sales year-over-year.

Operating profit for the second quarter of 2014 for the Office segment was $6.4 million, an increase of $3.0 million, or 88.2%, when compared with the same period in 2013. Operating profit for the six months ended June 30, 2014 for the Office segment was $7.5 million, an increase of $2.1 million, or 38.9%, when compared with the same period in 2013. The increase in operating profit in the Office segment was attributable to increased sales, improved pricing, and benefits from our supply chain transformation efforts. As a percentage of net sales, the Office segment operating profit for the three and six months ended June 30, 2014 was 4.0% and 2.5%, respectively. As a percentage of net sales, the Office segment operating profit for the three and six months ended June 30, 2013 was 2.3% and 1.9%, respectively.

Studio:

Net sales for the Studio segment for the second quarter of 2014 were $76.3 million, an increase of $39.1 million, or 105.1%, when compared with the same period in 2013. Net sales for the Studio segment for the six months ended June 30, 2014 were $132.0 million, an increase of $56.3 million, or 74.4%, when compared with the same period in 2013. The increase in sales in the Studio segment was mainly the result of the acquisition of HOLLY HUNTŪ during the first quarter of 2014 as well as organic growth in Europe and North America.

Operating profit for the second quarter of 2014 for the Studio segment was $9.5 million, an increase of $6.2 million, or 187.9%, when compared with the same period in 2013. Operating profit for the six months ended June 30, 2014 for the Studio segment was $15.0 million, an increase of $7.6 million, or 102.7%, when compared with the same period in 2013. As a percentage of net sales, the Studio segment operating profit was 12.5% for the second quarter ended June 30, 2014, up from 8.9% for the second quarter ended June 30, 2013. As a percentage of net sales, the Studio segment operating profit was 11.4% for the six months ended June 30, 2014, up from 9.8% for the same period in the prior year. The increase in operating profit for the three and six months ended June 30, 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 second quarter of 2014 for the Coverings segment were $30.4 million, an increase of $1.4 million, or 4.8%, when compared with the same period in 2013. Net sales for the six months ended June 30, 2014 for the Coverings segment were $57.9 million, an increase of $4.2 million, or 7.8%, when compared with the same period in 2013. The increase in net sales for the Coverings segment for the three and six months ended June 30, 2014 was the result of increased sales by our leather business.

Operating profit for the second quarter of 2014 for the Coverings segment was $6.3 million, an increase of $0.6 million, or 10.5%, when compared with the same period of 2013. Operating profit for the six months ended June 30, 2014 for the Coverings segment was $11.6 million, an increase of $1.7 million, or 17.2%, when compared with the same period in 2013. The increase in operating profit in the Coverings segment during the three and six months ended June 30, 2014 was the result of improved operating performance throughout the segment. As a percentage of net sales, the Coverings segment operating profit was 20.7% for the second quarter ended June 30, 2014 and 19.7% for the second quarter ended June 30, 2013. As a percentage of net sales, the Coverings segment operating profit was 20.0% for the six months ended June 30, 2014 and 18.4% for the same period in the prior year.


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Liquidity and Capital Resources

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

                                                    Six Months Ended
                                                 June 30,      June 30,
                                                   2014          2013
                                                     (in thousands)
Cash provided by operating activities           $  31,277     $  16,011
Capital expenditures                              (17,741 )     (17,139 )
Purchase of a business, net of cash acquired      (93,349 )           -
Cash used in investing activities                (111,405 )     (17,414 )
Proceeds from revolving credit facility           608,000       133,000
Repayment of revolving credit facility           (515,000 )    (138,000 )
Payment of dividends                              (11,363 )     (11,257 )
Proceeds from the issuance of common stock          2,590         2,147
Purchase of common stock for treasury              (6,227 )      (2,513 )
Cash provided by (used in) financing activities    76,296       (16,428 )

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 half of 2014 when compared with the same period in the prior year. Moreover, 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.

Year-to-date net cash provided by operations was $31.3 million, of which $32.3 million was provided by net income plus non-cash items, offset by $1.0 million of unfavorable changes in operating assets and liabilities. For the six months ended June 2013, net cash provided by operations was $16.0 million, of which $24.2 million was provided by net income plus non-cash items, offset by $8.2 million of unfavorable changes in assets and liabilities.

For the six months ended June 30, 2014, we used available cash, including $31.3 million of net cash from operating activities, to fund $17.7 million in capital expenditures, make dividend payments to shareholders totaling $11.4 million, and fund working capital. During the six months ended June 30, 2014, we also used cash of $93.3 million, net of cash acquired, in order to fund the acquisition of HOLLY HUNTŪ. Total cash used in / provided by investing and financing activities was $111.4 million and $76.3 million, respectively, for the six months ended June 30, 2014.

For the six months ended June 30, 2013, we used available cash, including $16.0 million of net cash from operating activities, to fund $17.1 million in capital expenditures, fund dividend payments to shareholders totaling $11.3 million, repurchase $2.5 million of common stock for treasury, and fund working capital. Total cash used in investing and financing activities was $17.4 million and $16.4 million, respectively, for the six months ended June 30, 2013.

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 June 30, 2014 and December 31, 2013, there was $266.0 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 May 2019.


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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) and our consolidated interest coverage ratio, defined as the ratio of our consolidated EBITDA (as defined in our credit agreement) to our consolidated interest expense. Our leverage ratio cannot exceed 4.5 to 1 at the end of the second, third, and fourth fiscal quarters of 2014, as per the new credit facility agreement. Thereafter, the leverage ratio cannot exceed 4.0 to 1. Our consolidated interest coverage ratio cannot be less than 3.0 to 1 as of the end of any fiscal quarter. 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. One full quarter post the HOLLY HUNT acquisition, with improving EBITDA and continued debt pay down, our bank leverage ratio is 2.93.

The following table reconciles net income to adjusted EBITDA and computes our bank leverage calculation as of June 30, 2014. The bank leverage calculation is in accordance with our Second Amended and Restated Credit Agreement dated May 20, 2014.

                               June 30, 2014
                               (in millions)
Debt Levels (1)               $         287.8
LTM Net Income                           28.2
LTM Adjustments
Interest                                  5.9
Taxes                                    17.4
Depreciation and Amortization            17.8
Non-cash items (2)                       28.8
LTM Adjusted EBITDA (3)       $          98.1
Bank Leverage Calculation (4)            2.93

(1) - Outstanding debt levels include outstanding letters of credit and guarantee obligations. Excess cash over $15.0 million reduces outstanding debt per the terms of our credit facility, a copy of which was filed with the Securities and Exchange Commission on May 21, 2014.
(2) - Non-cash items include, but are not limited to, stock-based compensation expenses and unrealized gains and losses on foreign exchange.
(3) - Includes an annualized pro forma EBITDA for HOLLY HUNT, which was acquired on February 3, 2014.
(4) - Debt divided by LTM (Last Twelve Months) Adjusted EBITDA, as calculated in accordance with our credit facility.

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.


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