UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 20162017
OR
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 001-12907
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A Delaware Corporation | | I.R.S. Employer No. 13-3873847 |
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1235 Water Street |
East Greenville, PA 18041 |
Telephone Number (215) 679-7991 |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and large accelerated filer”“emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer x, | Accelerated filer o, | Non-accelerated filer o, | Smaller reporting company o | Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes o No x
As of August 5, 2016,7, 2017, there were 49,113,67149,321,826 shares (including 1,042,129853,360 non-voting restricted shares) of the Registrant’s common stock, par value $0.01 per share, outstanding.
KNOLL, INC.
TABLE OF CONTENTS FOR FORM 10-Q
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
KNOLL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share and per share data)
| | | June 30, 2016 | | December 31, 2015 | June 30, 2017 | | December 31, 2016 |
ASSETS | (Unaudited) | | |
| (Unaudited) | | |
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Current assets: | |
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Cash and cash equivalents | $ | 3,548 |
| | $ | 4,192 |
| $ | 5,924 |
| | $ | 9,854 |
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Customer receivables, net of allowance for doubtful accounts of $9,197 and $7,919, respectively | 99,383 |
| | 116,532 |
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Customer receivables, net of allowance for doubtful accounts of $6,108 and $8,059, respectively | | 77,762 |
| | 84,425 |
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Inventories, net | 146,475 |
| | 140,798 |
| 150,076 |
| | 142,072 |
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Deferred income taxes | 20,398 |
| | 20,485 |
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Prepaid and other current assets | 29,541 |
| | 26,765 |
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Prepaid expenses | | 28,801 |
| | 27,461 |
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Other current assets | | 13,957 |
| | 12,996 |
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Total current assets | 299,345 |
| | 308,772 |
| 276,520 |
| | 276,808 |
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Property, plant, and equipment, net | 179,872 |
| | 172,142 |
| 204,693 |
| | 197,084 |
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Goodwill | 128,142 |
| | 127,671 |
| 141,759 |
| | 141,391 |
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Intangible assets, net | 238,565 |
| | 240,169 |
| 240,226 |
| | 241,870 |
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Other non-trade receivables | 1,966 |
| | 2,254 |
| 27 |
| | 26 |
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Other noncurrent assets | 1,110 |
| | 2,795 |
| 1,423 |
| | 1,434 |
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Total assets | $ | 849,000 |
| | $ | 853,803 |
| $ | 864,648 |
| | $ | 858,613 |
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LIABILITIES AND EQUITY | |
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Current liabilities: | |
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Current maturities of long-term debt | $ | 10,000 |
| | $ | 10,000 |
| $ | 10,000 |
| | $ | 10,000 |
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Accounts payable | 80,289 |
| | 89,552 |
| 99,885 |
| | 97,518 |
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Income taxes payable | | 32 |
| | 81 |
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Other current liabilities | 105,626 |
| | 116,488 |
| 94,955 |
| | 114,774 |
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Total current liabilities | 195,915 |
| | 216,040 |
| 204,872 |
| | 222,373 |
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Long-term debt | 198,051 |
| | 209,718 |
| 223,716 |
| | 208,383 |
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Deferred income taxes | 77,945 |
| | 75,959 |
| 80,123 |
| | 76,854 |
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Postretirement benefits other than pensions | 6,379 |
| | 6,294 |
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Post-employment benefits other than pensions | | 4,976 |
| | 5,124 |
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Pension liability | 61,992 |
| | 63,441 |
| 13,332 |
| | 17,428 |
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Other noncurrent liabilities | 20,784 |
| | 26,877 |
| 17,303 |
| | 18,982 |
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Total liabilities | 561,066 |
| | 598,329 |
| 544,322 |
| | 549,144 |
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Commitments and contingent liabilities |
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Equity: | |
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Common stock, $0.01 par value; 200,000,000 shares authorized; 64,690,526 shares issued and 49,092,583 shares outstanding (including 1,050,462 non-voting restricted shares and net of 15,597,943 treasury shares) at June 30, 2016 and 64,603,344 shares issued and 48,822,013 shares outstanding (including 993,934 non-voting restricted shares and net of 15,781,331 treasury shares) at December 31, 2015 | 491 |
| | 488 |
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Common stock, $0.01 par value; 200,000,000 shares authorized; 65,434,707 shares issued and 49,321,826 shares outstanding (including 853,360 non-voting restricted shares and net of 16,112,881 treasury shares) at June 30, 2017 and 64,741,648 shares issued and 49,096,290 shares outstanding (including 993,962 non-voting restricted shares and net of 15,645,358 treasury shares) at December 31, 2016 | | 493 |
| | 491 |
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Additional paid-in capital | 50,635 |
| | 47,165 |
| 50,170 |
| | 55,148 |
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Retained earnings | 268,573 |
| | 244,947 |
| 310,305 |
| | 297,011 |
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Accumulated other comprehensive loss | (31,974 | ) | | (37,318 | ) | (40,878 | ) | | (43,403 | ) |
Total Knoll, Inc. stockholders' equity | 287,725 |
| | 255,282 |
| 320,090 |
| | 309,247 |
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Noncontrolling interests | 209 |
| | 192 |
| 236 |
| | 222 |
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Total equity | 287,934 |
| | 255,474 |
| 320,326 |
| | 309,469 |
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Total liabilities and equity | $ | 849,000 |
| | $ | 853,803 |
| $ | 864,648 |
| | $ | 858,613 |
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See accompanying notes to the condensed consolidated financial statements.
KNOLL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
(dollars in thousands, except share and per share data)
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 | | 2017 | | 2016 |
Sales | $ | 294,700 |
| | $ | 268,622 |
| | $ | 579,329 |
| | $ | 535,120 |
| $ | 268,694 |
| | $ | 294,700 |
| | $ | 525,514 |
| | $ | 579,329 |
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Cost of sales | 180,636 |
| | 167,431 |
| | 357,501 |
| | 338,620 |
| 168,736 |
| | 180,636 |
| | 329,882 |
| | 357,501 |
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Gross profit | 114,064 |
| | 101,191 |
| | 221,828 |
| | 196,500 |
| 99,958 |
| | 114,064 |
| | 195,632 |
| | 221,828 |
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Selling, general, and administrative expenses | 80,590 |
| | 72,936 |
| | 156,505 |
| | 145,946 |
| 75,578 |
| | 80,590 |
| | 148,218 |
| | 156,505 |
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Restructuring charges | | 2,150 |
| | — |
| | 2,150 |
| | — |
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Operating profit | 33,474 |
| | 28,255 |
| | 65,323 |
| | 50,554 |
| 22,230 |
| | 33,474 |
| | 45,264 |
| | 65,323 |
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Interest expense | 1,307 |
| | 1,851 |
| | 2,861 |
| | 3,736 |
| 1,859 |
| | 1,307 |
| | 3,530 |
| | 2,861 |
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Other expense (income), net | 185 |
| | 200 |
| | 2,789 |
| | (6,957 | ) | |
Other expense, net | | 229 |
| | 185 |
| | 436 |
| | 2,789 |
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Income before income tax expense | 31,982 |
| | 26,204 |
| | 59,673 |
| | 53,775 |
| 20,142 |
| | 31,982 |
| | 41,298 |
| | 59,673 |
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Income tax expense | 10,678 |
| | 8,982 |
| | 21,100 |
| | 19,118 |
| 7,182 |
| | 10,341 |
| | 12,946 |
| | 20,621 |
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Net earnings | 21,304 |
| | 17,222 |
| | 38,573 |
| | 34,657 |
| 12,960 |
| | 21,641 |
| | 28,352 |
| | 39,052 |
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Net earnings (loss) attributable to noncontrolling interests | 6 |
| | (17 | ) | | 17 |
| | (25 | ) | |
Net earnings attributable to noncontrolling interests | | 22 |
| | 6 |
| | 14 |
| | 17 |
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Net earnings attributable to Knoll, Inc. stockholders | $ | 21,298 |
| | $ | 17,239 |
| | $ | 38,556 |
| | $ | 34,682 |
| $ | 12,938 |
| | $ | 21,635 |
| | $ | 28,338 |
| | $ | 39,035 |
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Net earnings per common share attributable to Knoll, Inc. stockholders: | |
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Basic | $ | 0.44 |
| | $ | 0.36 |
| | $ | 0.80 |
| | $ | 0.73 |
| $ | 0.27 |
| | $ | 0.45 |
| | $ | 0.59 |
| | $ | 0.81 |
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Diluted | $ | 0.44 |
| | $ | 0.36 |
| | $ | 0.79 |
| | $ | 0.72 |
| $ | 0.26 |
| | $ | 0.44 |
| | $ | 0.57 |
| | $ | 0.80 |
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Dividends per share | $ | 0.15 |
| | $ | 0.12 |
| | $ | 0.30 |
| | $ | 0.24 |
| $ | 0.15 |
| | $ | 0.15 |
| | $ | 0.30 |
| | $ | 0.30 |
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Weighted-average number of common shares outstanding: | |
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Basic | 48,018,733 |
| | 47,760,961 |
| | 47,961,661 |
| | 47,705,222 |
| 48,464,605 |
| | 48,018,733 |
| | 48,375,241 |
| | 47,961,661 |
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Diluted | 48,664,318 |
| | 48,509,546 |
| | 48,588,725 |
| | 48,445,060 |
| 49,376,506 |
| | 48,832,874 |
| | 49,294,525 |
| | 48,713,633 |
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Net earnings | $ | 21,304 |
| | $ | 17,222 |
| | $ | 38,573 |
| | $ | 34,657 |
| $ | 12,960 |
| | $ | 21,641 |
| | $ | 28,352 |
| | $ | 39,052 |
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Other comprehensive income (loss): | |
| | |
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Pension and other postretirement liability adjustment, net of tax | (136 | ) | | 1,382 |
| | (272 | ) | | 2,764 |
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Pension and other post-employment liability adjustment, net of tax | | (138 | ) | | (136 | ) | | (275 | ) | | (272 | ) |
Foreign currency translation adjustment | 1,566 |
| | 118 |
| | 5,616 |
| | (12,881 | ) | 2,320 |
| | 1,566 |
| | 2,800 |
| | 5,616 |
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Total other comprehensive income (loss), net of tax | 1,430 |
| | 1,500 |
| | 5,344 |
| | (10,117 | ) | 2,182 |
| | 1,430 |
| | 2,525 |
| | 5,344 |
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Total comprehensive income | 22,734 |
| | 18,722 |
| | 43,917 |
| | 24,540 |
| 15,142 |
| | 23,071 |
| | 30,877 |
| | 44,396 |
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Comprehensive income (loss) attributable to noncontrolling interests | 6 |
| | (17 | ) | | 17 |
| | (25 | ) | |
Comprehensive income attributable to noncontrolling interests | | 22 |
| | 6 |
| | 14 |
| | 17 |
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Comprehensive income attributable to Knoll, Inc. stockholders | $ | 22,728 |
| | $ | 18,739 |
| | $ | 43,900 |
| | $ | 24,565 |
| $ | 15,120 |
| | $ | 23,065 |
| | $ | 30,863 |
| | $ | 44,379 |
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See accompanying notes to the condensed consolidated financial statements.
KNOLL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
| | | Six Months Ended June 30, | Six Months Ended June 30, |
| 2016 | | 2015 | 2017 | | 2016 |
CASH FLOWS FROM OPERATING ACTIVITIES | |
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Net earnings | $ | 38,573 |
| | $ | 34,657 |
| $ | 28,352 |
| | $ | 39,052 |
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Adjustments to reconcile net earnings to cash provided by operating activities: | |
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Depreciation | 9,248 |
| | 8,776 |
| 10,668 |
| | 9,248 |
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Amortization expense (including deferred financing fees) | 1,977 |
| | 1,951 |
| 1,977 |
| | 1,977 |
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Inventory obsolescence | | 1,203 |
| | 1,423 |
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Loss on disposal of property, plant and equipment | | 29 |
| | 1 |
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Unrealized foreign currency (gains) losses | | (122 | ) | | 1,605 |
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Stock-based compensation | 4,592 |
| | 3,574 |
| 5,043 |
| | 4,592 |
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Inventory obsolescence | 1,423 |
| | 864 |
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Unrealized foreign currency losses (gains) | 1,605 |
| | (6,818 | ) | |
Bad debt and customer credits | 1,282 |
| | 384 |
| (1,650 | ) | | 1,282 |
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Loss on disposal of property, plant and equipment | 1 |
| | 227 |
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Changes in assets and liabilities: | |
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Customer receivables | 16,216 |
| | 8,864 |
| 8,420 |
| | 16,216 |
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Inventories | (6,410 | ) | | (5,945 | ) | (8,811 | ) | | (6,410 | ) |
Prepaid and other current assets | | (1,807 | ) | | (2,675 | ) |
Accounts payable | (10,109 | ) | | (36,399 | ) | 6,015 |
| | (10,109 | ) |
Current and deferred income taxes | 527 |
| | (11,437 | ) | 2,567 |
| | 710 |
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Other current assets | (2,675 | ) | | (1,765 | ) | |
Other current liabilities | (9,787 | ) | | 3,192 |
| (13,729 | ) | | (9,787 | ) |
Other noncurrent assets and liabilities | (786 | ) | | 7,317 |
| (5,917 | ) | | (786 | ) |
Cash provided by operating activities | 45,677 |
| | 7,442 |
| 32,238 |
| | 46,339 |
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CASH FLOWS FROM INVESTING ACTIVITIES | |
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Capital expenditures, net | (15,057 | ) | | (12,670 | ) | (20,756 | ) | | (15,057 | ) |
Cash used in investing activities | (15,057 | ) | | (12,670 | ) | (20,756 | ) | | (15,057 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES | |
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Proceeds from credit facility | 173,500 |
| | 170,000 |
| 214,000 |
| | 173,500 |
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Repayment of credit facility | (185,500 | ) | | (154,000 | ) | (199,000 | ) | | (185,500 | ) |
Payment of dividends | (14,727 | ) | | (11,502 | ) | (15,729 | ) | | (14,727 | ) |
Proceeds from the issuance of common stock | 2,120 |
| | 4,421 |
| 551 |
| | 2,120 |
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Purchase of common stock for treasury | (3,903 | ) | | (6,067 | ) | (10,570 | ) | | (3,903 | ) |
Contingent purchase price payment | (5,000 | ) | | (5,000 | ) | (6,000 | ) | | (5,000 | ) |
Tax benefit from the exercise of stock options and vesting of equity awards | 662 |
| | 979 |
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Cash used in financing activities | (32,848 | ) | | (1,169 | ) | (16,748 | ) | | (33,510 | ) |
Effect of exchange rate changes on cash and cash equivalents | 1,584 |
| | (2,282 | ) | 1,336 |
| | 1,584 |
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Net decrease in cash and cash equivalents | (644 | ) | | (8,679 | ) | (3,930 | ) | | (644 | ) |
Cash and cash equivalents at beginning of period | 4,192 |
| | 19,021 |
| 9,854 |
| | 4,192 |
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Cash and cash equivalents at end of period | $ | 3,548 |
| | $ | 10,342 |
| $ | 5,924 |
| | $ | 3,548 |
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See accompanying notes to the condensed consolidated financial statements.
KNOLL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Knoll, Inc. (the “Company”) have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The consolidated balance sheet of the Company, as of December 31, 2015,2016, was derived from the Company’s audited consolidated balance sheet as of that date. All other condensed consolidated financial statements contained herein are unaudited and reflect all adjustments which are, in the opinion of management, necessary to summarize fairly the financial position of the Company and the results of the Company’s operations and cash flows for the periods presented. All of these adjustments are of a normal recurring nature. The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and any partially owned subsidiaries that the Company has the ability to control. All significant intercompany balances and transactions have been eliminated in consolidation. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2015.2016.
New Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (“ASU”)ASU No. 2014-09, Revenue“Revenue from Contracts with Customers. Customers”, which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. This ASU supersedes the revenue recognition requirements in Accounting Standards CodificationFASB ASC Topic 605, Revenue“Revenue Recognition,,” and most industry-specific guidance throughoutguidance. This ASU sets forth a five-step model for determining when and how revenue is recognized. Under the Accounting Standards Codification. The standard requires thatmodel, an entity recognizeswill be required to recognize revenue to depict the transfer of promised goods or services to customers ina customer at an amount that reflectsreflecting the consideration to which the companyit expects to be entitledreceive in exchange for those goods or services. This ASU 2014-09 is effective for fiscal yearsinterim and annual periods beginning after December 15, 2016. The FASB subsequently deferred the effective date of this standard to December 15, 2017 and for interim periods therein.with early adoption permitted as of December 15, 2016. The guidanceCompany will adopt the new standard in the annual period beginning January 1, 2018. The standard permits the use of either athe full retrospective or modified retrospective (cumulative effect) transition method. Transition practical expedients are available for both methods. The Company plans to apply the modified retrospective transition method. The Company hasassembled an implementation work team to assess and document the accounting conclusions for the adoption of ASU 2014-09. Based on this analysis, the Company does not yet selected a transition method and is currently evaluatingbelieve the impactadoption of the amended guidanceASU will have a material impact to the financial statements. The Company continues to assess the potential impact on the consolidated financial position, results of operationsaccounting policies, internal control processes and related disclosures.
In April 2015,disclosures required under the FASB issued ASU No. 2015-03 - Interest—Imputation of Interest (Subtopic 835-30). This ASU simplifies the presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct reduction from the carrying amount of the debt liability, which is consistent with the treatment of debt discounts. The new guidance should be applied on a retrospective basis, and upon transition, an entity is required to comply with the applicable disclosures necessary for a change in accounting principle. This ASU is effective for fiscal years beginning after December 15, 2015, and for interim periods within those fiscal years. The Company reclassified deferred financing fees of $1.9 million and $2.3 million from other noncurrent assets to long-term debt as of June 30, 2016 and December 31, 2015, respectively.guidance.
In July 2015, the FASB issued ASU 2015-11 - Inventory (Topic 330), which amends existing guidance for measuring inventories. This amendment will require the Company to measure inventories recorded using the first-in, first-out method at the lower of cost and net realizable value. This amendment does not change the methodology for measuring inventories recorded using the last-in, first-out method. This amendment will beis effective for fiscal years beginning after December 15, 2016. Early adoption is permitted. The Company does not expectadopted this standard during the impact ofthree months ended March 31, 2017, and the adoption of this ASU to have a material impact on its consolidated financial position, results of operations and cash flows.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. The amendments in this ASU require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this ASU are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. The amendments in this ASU may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company doeswas not expect the impact of the adoption of this ASU to have a material impact on its consolidated financial position.material.
In February 2016, the FASB issued ASU 2016-02,guidance codified in ASC 842, Leases, (Topic 842) which supersedes the guidance in orderASC 840, Leases. ASC 842 will be effective for the Company on January 1, 2019, and the Company will adopt the standard using the modified retrospective approach. While the Company continues to increase transparency and comparability among organizations by recognizing leaseevaluate the provisions of ASC 842 to determine how it will be affected, the primary effect of adopting the new standard will be to record assets and lease liabilities on the balance sheetobligations for those leases classified ascurrent operating leases. ASU 2016-02 requires that a lessee should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 (including interim periods within those periods) using a modified retrospective approach and early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption of the ASU on its consolidated financial statements.
KNOLL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTSIn January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the accounting for goodwill impairment by removing the second step of the goodwill impairment test that requires a hypothetical purchase price allocation. Under the new guidance, goodwill impairment will be measured and recognized as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill allocated to the reporting unit. The revised guidance does not affect the reporting entity’s ability to first assess qualitative factors by reporting unit to determine whether it is necessary to perform the quantitative goodwill impairment test. The guidance is effective for goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017.
In March 2016,2017, the FASB issued ASU 2016-09,2017-07, Improvements to Employee Share-Based Payment AccountingCompensation-Retirement Benefits (Topic 715)., which amends Accounting Standards Codification Topic 718, Compensation – Stock Compensation. The new standard improves the presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016,2017, including interim periods within those fiscal years. The new standard will require all components of the Company's net periodic benefit cost (income), with the exception of service cost, currently reported within selling, general and administrative expenses, to be reclassified and reported within other expense. The adoption of this new standard will have no impact on pre-tax income or net income reported.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718). The new standard provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. Under the new guidance, an entity should account for the effects of a modification unless all of the following are met, (i) the fair value of the modified award is the same as the fair value of the original award, (ii) the vesting conditions of the modified award are the same as the original awards immediately before modification, and (iii) the classification of the modified award as an equity instrument or liability instrument is the same as the classification immediately prior to modification. The guidance is effective for annual periods and interim periods within those fiscal years and earlybeginning after December 15, 2017. Early adoption is permitted. The Company does not expect the impact ofpermitted for annual and interim periods with a prospective application to an award modified on or after the adoption date. At this time, the Company believes there will be an immaterial impact to the financial statements as a result of adopting this ASU to have a material impact on its consolidated financial statements.ASU.
NOTE 2. INVENTORIES
Information regarding the Company's inventories is as follows (in thousands):
| | | June 30, 2016 | | December 31, 2015 | June 30, 2017 | | December 31, 2016 |
Raw materials | $ | 61,448 |
| | $ | 58,412 |
| $ | 59,247 |
| | $ | 60,217 |
|
Work-in-process | 7,777 |
| | 7,470 |
| 7,830 |
| | 7,186 |
|
Finished goods | 77,250 |
| | 74,916 |
| 82,999 |
| | 74,669 |
|
| $ | 146,475 |
| | $ | 140,798 |
| $ | 150,076 |
| | $ | 142,072 |
|
Inventory reserves for obsolescence and other estimated losses were $9.5$10.6 million and $8.3$9.5 million at June 30, 20162017 and December 31, 2015,2016, respectively, and have been included in the amounts above.
NOTE 3. INCOME TAXESPENSION AND OTHER POST-EMPLOYMENT BENEFITS
The Company’sfollowing tables set forth the components of the net periodic benefit income tax provision consists of federal, state and foreign income taxes. The tax provisions for the three months ended June 30, 2016Company's pension and 2015 were based on the estimated effective tax rates applicable for the full years ending December 31, 2016 and 2015, which includes items specifically related to the interim periods. The Company’s effective tax rate was 35.4% and 35.6% for the six months ended June 30, 2016 and 2015, respectively. The decrease in the Company's effective tax rate for the six months ended June 30, 2016 was a result of the geographic mix of pretax income and the varying effective tax rates in the countries and states in which the Company operates, and a favorable income tax examination ruling received from a non-U.S. income tax jurisdiction.other post-employment benefit plans (in thousands):
As of June 30, 2016 and December 31, 2015, the Company had unrecognized tax benefits of approximately $1.2 million and $4.4 million, respectively. These unrecognized tax benefit amounts would affect the effective tax rate if recognized. During the six months ended June 30, 2016, the Company paid approximately $3.2 million of certain tax liabilities as a result of filing amended returns. As of June 30, 2016, the Company is subject to U.S. Federal income tax examinations for the tax years 2012 through 2015, and to non-U.S. income tax examinations for the tax years 2009 through 2015. In addition, the Company is subject to state and local income tax examinations for the tax years 2011 through 2015. |
| | | | | | | | | | | | | | | |
| Pension Benefits | | Other Benefits |
| Three Months Ended June 30, | | Three Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Service cost | $ | 175 |
| | $ | 468 |
| | $ | — |
| | $ | — |
|
Interest cost | 2,390 |
| | 2,416 |
| | 43 |
| | 49 |
|
Expected return on plan assets | (4,615 | ) | | (3,612 | ) | | — |
| | — |
|
Amortization of prior service credit | — |
| | — |
| | (371 | ) | | (280 | ) |
Recognized actuarial loss (gain) | 154 |
| | 123 |
| | 1 |
| | (62 | ) |
Net periodic benefit (income) cost | $ | (1,896 | ) | | $ | (605 | ) | | $ | (327 | ) | | $ | (293 | ) |
|
| | | | | | | | | | | | | | | |
| Pension Benefits | | Other Benefits |
| Six Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Service cost | $ | 350 |
| | $ | 936 |
| | $ | — |
| | $ | — |
|
Interest cost | 4,780 |
| | 4,832 |
| | 86 |
| | 98 |
|
Expected return on plan assets | (9,230 | ) | | (7,224 | ) | | — |
| | — |
|
Amortization of prior service credit | — |
| | — |
| | (742 | ) | | (560 | ) |
Recognized actuarial loss (gain) | 308 |
| | 246 |
| | 2 |
| | (124 | ) |
Net periodic benefit (income) cost | $ | (3,792 | ) | | $ | (1,210 | ) | | $ | (654 | ) | | $ | (586 | ) |
NOTE 4. CONTINGENT LIABILITIES AND COMMITMENTSFAIR VALUE OF FINANCIAL INSTRUMENTS
LitigationFinancial Instruments
The Company is currently involved in matters of litigation, including environmental contingencies, arising in the ordinary course of business. The Company accrues for such matters when expenditures are probable and reasonably estimable. Based upon information presently known, management isfair values of the opinion that such litigation, either individually or in the aggregate, will not have a material adverse effect onCompany’s cash and cash equivalents, customer receivables, and accounts payable approximate carrying value due to their short maturities.
The fair value of the Company’s financial position, resultslong-term debt approximates its carrying value, as it is variable rate debt and the terms are comparable to market terms as of operations, or cash flows.the balance sheet dates, and are classified as Level 2.
WarrantyAssets and Liabilities Recorded at Fair Value on a Recurring Basis
The Company providesfollowing table represents the assets and liabilities, measured at fair value on a recurring basis and the basis for estimated product warranty expenses when related products are sold and are included within other current liabilities. Because warranty estimates are forecasts that are based on the best available information, primarily historical claims experience, future warranty claims may differ from the amounts provided.measurement (in thousands):
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value as of June 30, 2017 | | Fair Value as of December 31, 2016 |
Liabilities: | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Contingent purchase price payment - HOLLY HUNT® | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 6,000 |
| | $ | 6,000 |
|
Contingent purchase price payment - DatesWeiser | — |
| | — |
| | 1,100 |
| | 1,100 |
| | — |
| | — |
| | 1,100 |
| | 1,100 |
|
Total | $ | — |
| | $ | — |
| | $ | 1,100 |
| | $ | 1,100 |
| | $ | — |
| | $ | — |
| | $ | 7,100 |
| | $ | 7,100 |
|
Changes
Pursuant to the agreement governing the acquisition of HOLLY HUNT®, the Company was required to make annual contingent purchase price payments. The payouts were based upon HOLLY HUNT® reaching an annual net sales target, for each year through 2016, and were paid out on or around February 20 of the following calendar year. The Company classifies this as a Level 3 measurement and is required to remeasure this liability at fair value on a recurring basis. The fair value of such contingent purchase price payments, totaling $16.0 million, was determined at the time of acquisition based upon net sales projections for HOLLY HUNT® for 2014, 2015, and 2016. The Company paid the remaining $6.0 million contingent purchase price in the warranty reservethree months ended March 31, 2017, as a result of HOLLY HUNT® achieving the 2016 net sales projections.
Pursuant to the agreement governing the acquisition of DatesWeiser, the Company may be required to make annual contingent purchase price payments. The payouts are based upon DatesWeiser reaching an annual net sales target, for each year through 2020. The Company classifies this as a Level 3 measurement and is required to remeasure this liability at fair value on a recurring basis. The fair value of such contingent purchase price payments, totaling $1.1 million, was determined at the time of acquisition based upon net sales projections for DatesWeiser for 2017, 2018, 2019 and 2020. Excluding the initial recognition of the liability for the contingent purchase price payments and payments made to reduce the liability, any changes in the fair value will be included within selling, general and administrative expenses.
There were no additional assets and/or liabilities recorded at fair value on a recurring basis as of June 30, 2017 or December 31, 2016.
NOTE 5. OTHER CURRENT LIABILITIES
Information regarding the Company's other current liabilities is as follows (in thousands):
|
| | | | |
Balance, December 31, 2015 | | $ | 8,513 |
|
Provision for warranty claims | | 3,448 |
|
Warranty claims paid | | (3,219 | ) |
Foreign currency translation adjustment | | 38 |
|
Balance, June 30, 2016 | | $ | 8,780 |
|
|
| | | | | | | |
| June 30, 2017 | | December 31, 2016 |
Accrued employee compensation | $ | 29,070 |
| | $ | 46,508 |
|
Customer deposits | 34,640 |
| | 31,216 |
|
Warranty | 8,944 |
| | 8,906 |
|
Contingent payout | 1,100 |
| | 7,100 |
|
Other | 21,201 |
| | 21,044 |
|
Other current liabilities | $ | 94,955 |
| | $ | 114,774 |
|
NOTE 5.6. INDEBTEDNESS
The Company's long-term debt is summarized as follows (in thousands):
| | | June 30, 2016 | | December 31, 2015 | June 30, 2017 | | December 31, 2016 |
Balance of revolving credit facility | $ | 30,000 |
| | $ | 37,000 |
| $ | 65,000 |
| | $ | 45,000 |
|
Balance of term loan | 180,000 |
| | 185,000 |
| 170,000 |
| | 175,000 |
|
Total long-term debt | 210,000 |
| | 222,000 |
| 235,000 |
| | 220,000 |
|
Less: Current maturities of long-term debt | 10,000 |
| | 10,000 |
| 10,000 |
| | 10,000 |
|
Less: Deferred financing fees, net | 1,949 |
| | 2,282 |
| 1,284 |
| | 1,617 |
|
Long-term debt | $ | 198,051 |
| | $ | 209,718 |
| $ | 223,716 |
| | $ | 208,383 |
|
NOTE 6. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table summarizes the changes in accumulated other comprehensive income (loss) by component for the six months ended June 30, 2016 (in thousands):
|
| | | | | | | | | | | |
| Foreign Currency Translation Adjustment | | Pension and Other Post-Retirement Liability Adjustment | | Total |
Balance, as of December 31, 2015 | $ | (14,486 | ) | | $ | (22,832 | ) | | $ | (37,318 | ) |
Other comprehensive income before reclassifications | 5,616 |
| | — |
| | 5,616 |
|
Amounts reclassified from accumulated other comprehensive income | — |
| | (272 | ) | | (272 | ) |
Net current-period other comprehensive income (loss) | 5,616 |
| | (272 | ) | | 5,344 |
|
Balance, as of June 30, 2016 | $ | (8,870 | ) | | $ | (23,104 | ) | | $ | (31,974 | ) |
The following reclassifications were made from accumulated other comprehensive income (loss) to the condensed consolidated statements of operations and other comprehensive income (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2016 | | June 30, 2015 | | June 30, 2016 | | June 30, 2015 |
Amortization of pension and other post-retirement liability adjustments | | | | | | | |
Prior service credits (1) | $ | (280 | ) | | $ | (72 | ) | | $ | (560 | ) | | $ | (144 | ) |
Actuarial losses (1) | 61 |
| | 2,258 |
| | 122 |
| | 4,516 |
|
Total before tax | (219 | ) | | 2,186 |
| | (438 | ) | | 4,372 |
|
Tax expense (benefit) | 83 |
| | (804 | ) | | 166 |
| | (1,608 | ) |
Net of tax | $ | (136 | ) | | $ | 1,382 |
| | $ | (272 | ) | | $ | 2,764 |
|
(1) These accumulated other comprehensive income (loss) components are included in the computation of net periodic pension costs. See Note 7 for additional information.
KNOLL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. PENSION AND OTHER POSTRETIREMENT BENEFITS
The following table sets forth the components of the net periodic benefit cost for the Company's pension and other postretirement benefit plans (in thousands):
|
| | | | | | | | | | | | | | | |
| Pension Benefits | | Other Benefits |
| Three Months Ended June 30, | | Three Months Ended June 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Service cost | $ | 468 |
| | $ | 1,887 |
| | $ | — |
| | $ | 4 |
|
Interest cost | 2,416 |
| | 3,114 |
| | 49 |
| | 80 |
|
Expected return on plan assets | (3,612 | ) | | (3,655 | ) | | — |
| | — |
|
Amortization of prior service credit | — |
| | — |
| | (280 | ) | | (72 | ) |
Recognized actuarial loss (gain) | 123 |
| | 2,166 |
| | (62 | ) | | 92 |
|
Net periodic benefit (income) cost | $ | (605 | ) | | $ | 3,512 |
| | $ | (293 | ) | | $ | 104 |
|
For the three months ended June 30, 2016, $0.3 million of pension income was recognized in cost of sales and $0.3 million was recognized in selling, general, and administrative expenses. For the three months ended June 30, 2015, $2.0 million of pension expense was incurred in cost of sales and $1.5 million was incurred in selling, general, and administrative expenses.
|
| | | | | | | | | | | | | | | |
| Pension Benefits | | Other Benefits |
| Six Months Ended June 30, | | Six Months Ended June 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Service cost | $ | 936 |
| | $ | 3,774 |
| | $ | — |
| | $ | 8 |
|
Interest cost | 4,832 |
| | 6,228 |
| | 98 |
| | 160 |
|
Expected return on plan assets | (7,224 | ) | | (7,310 | ) | | — |
| | — |
|
Amortization of prior service credit | — |
| | — |
| | (560 | ) | | (144 | ) |
Recognized actuarial loss (gain) | 246 |
| | 4,332 |
| | (124 | ) | | 184 |
|
Net periodic benefit (income) cost | $ | (1,210 | ) | | $ | 7,024 |
| | $ | (586 | ) | | $ | 208 |
|
For the six months ended June 30, 2016, $0.6 million of pension income was recognized in cost of sales and $0.6 million was recognized in selling, general, and administrative expenses. For the six months ended June 30, 2015, $4.0 million of pension expense was incurred in cost of sales and $3.0 million was incurred in selling, general, and administrative expenses.
During 2016, the Company expects to contribute $8.0 million and $2.0 million in discretionary contributions to the union and nonunion pension plans, respectively.
KNOLL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. COMMON STOCK AND EARNINGS PER SHARE
Basic earnings per share excludes the dilutive effect of common shares that could potentially be issued due to the exercise of stock options and unvested restricted stock and restricted stock units, and is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share includes the effect of shares and potential shares and units issued under the stock incentive plans. The following table sets forth the reconciliation from basic to dilutive average common shares (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Numerator: | | | | | | | |
Net earnings attributable to Knoll, Inc. stockholders | $ | 21,298 |
| | $ | 17,239 |
| | $ | 38,556 |
| | $ | 34,682 |
|
| | | | | | | |
Denominator: | | | | | | | |
Denominator for basic earnings per share - weighted-average shares | 48,019 |
| | 47,761 |
| | 47,962 |
| | 47,705 |
|
Effect of dilutive securities: | | | | | | | |
Potentially dilutive shares resulting from stock plans | 645 |
| | 749 |
| | 627 |
| | 740 |
|
Denominator for diluted earnings per share - weighted-average shares | 48,664 |
| | 48,510 |
| | 48,589 |
| | 48,445 |
|
Antidilutive equity awards not included in weighted-average common shares—diluted | — |
| | — |
| | — |
| | — |
|
| | | | | | | |
Net earnings per common share attributable to Knoll, Inc. stockholders: | |
| | |
| | | | |
Basic | $ | 0.44 |
| | $ | 0.36 |
| | $ | 0.80 |
| | $ | 0.73 |
|
Diluted | $ | 0.44 |
| | $ | 0.36 |
| | $ | 0.79 |
| | $ | 0.72 |
|
NOTE 9. EQUITY
The following table shows the change in equity attributable to Knoll, Inc. stockholders and noncontrolling interests during the six months ended June 30, 2016 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Knoll, Inc. Stockholders' Equity | | Noncontrolling Interests | | Total Equity |
Balance at December 31, 2015 | | $ | 488 |
| | $ | 47,165 |
| | $ | 244,947 |
| | $ | (37,318 | ) | | $ | 255,282 |
| | $ | 192 |
| | $ | 255,474 |
|
Net earnings | | — |
| | — |
| | 38,556 |
| | — |
| | 38,556 |
| | 17 |
| | 38,573 |
|
Other comprehensive income | | — |
| | — |
| | — |
| | 5,344 |
| | 5,344 |
| | — |
| | 5,344 |
|
Shares issued for consideration: | | | | | | | | | | | | | | |
Exercise of stock options (165,000 shares) | | 2 |
| | 2,070 |
| | — |
| | — |
| | 2,072 |
| | — |
| | 2,072 |
|
Income tax effect from the exercise of stock options and vesting of equity awards | | — |
| | 662 |
| | — |
| | — |
| | 662 |
| | — |
| | 662 |
|
Shares issued under stock incentive plan (297,632) | | 3 |
| | (3 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
Shares issued to Board of Directors in lieu of cash (2,182 shares) | | — |
| | 50 |
| | — |
| | — |
| | 50 |
| | — |
| | 50 |
|
Stock-based compensation | | — |
| | 4,592 |
| | — |
| | — |
| | 4,592 |
| | — |
| | 4,592 |
|
Cash dividend ($0.30 per share) | | — |
| | — |
| | (14,930 | ) | | — |
| | (14,930 | ) | | — |
| | (14,930 | ) |
Purchase of common stock (188,169 shares) | | (2 | ) | | (3,901 | ) | | — |
| | — |
| | (3,903 | ) | | — |
| | (3,903 | ) |
Balance at June 30, 2016 | | $ | 491 |
| | $ | 50,635 |
| | $ | 268,573 |
| | $ | (31,974 | ) | | $ | 287,725 |
| | $ | 209 |
| | $ | 287,934 |
|
KNOLL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. FAIR VALUE OF FINANCIAL INSTRUMENTS7. CONTINGENT LIABILITIES AND COMMITMENTS
Financial InstrumentsLitigation
The carrying valueCompany is currently involved in matters of litigation, including environmental contingencies, arising in the ordinary course of business. The Company accrues for such matters when expenditures are probable and reasonably estimable. Based upon information presently known, management is of the opinion that such litigation, either individually or in the aggregate, will not have a material adverse effect on the Company’s financial position, results of operations, or cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to their short maturities.flows.
Warranty
The carrying value of the Company’s long-term debt approximates its fair value, as it is variable rate debt and the termsCompany provides for estimated product warranty expenses when related products are comparable to market terms as of the balance sheet dates,sold and are classifiedincluded within other current liabilities. Because warranty estimates are forecasts that are based on the best available information, primarily historical claims experience, future warranty claims may differ from the amounts provided.
Changes in the warranty reserve are as Level 2.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The following table represents the assets and liabilities, measured at fair value on a recurring basis and the basis for that measurementfollows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value as of June 30, 2016 | | Fair Value as of December 31, 2015 |
Liabilities: | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Contingent purchase price payment | $ | — |
| | $ | — |
| | $ | 6,000 |
| | $ | 6,000 |
| | $ | — |
| | $ | — |
| | $ | 11,000 |
| | $ | 11,000 |
|
|
| | | | |
Balance, December 31, 2016 | | $ | 8,906 |
|
Provision for warranty claims | | 2,832 |
|
Warranty claims paid | | (3,044 | ) |
Foreign currency translation adjustment | | 250 |
|
Balance, June 30, 2017 | | $ | 8,944 |
|
PursuantWarranty expense for the three and six months ended June 30, 2017 was $1.7 million and $2.8 million, respectively. Warranty expense for the three and six months ended June 30, 2016 was $1.8 million and $3.4 million, respectively.
NOTE 8. EQUITY
The following table shows the change in equity attributable to Knoll, Inc. stockholders and noncontrolling interests during the six months ended June 30, 2017 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Knoll, Inc. Stockholders' Equity | | Noncontrolling Interests | | Total Equity |
Balance at December 31, 2016 | | $ | 491 |
| | $ | 55,148 |
| | $ | 297,011 |
| | $ | (43,403 | ) | | $ | 309,247 |
| | $ | 222 |
| | $ | 309,469 |
|
Net earnings | | — |
| | — |
| | 28,338 |
| | — |
| | 28,338 |
| | 14 |
| | 28,352 |
|
Other comprehensive income | | — |
| | — |
| | — |
| | 2,525 |
| | 2,525 |
| | — |
| | 2,525 |
|
Shares issued for consideration: | | | | | | | | | | | | | | |
Exercise of stock options (22,500 shares) | | — |
| | 472 |
| | — |
| | — |
| | 472 |
| | — |
| | 472 |
|
Shares issued under stock incentive plan (676,850) | | 7 |
| | (3 | ) | | — |
| | — |
| | 4 |
| | — |
| | 4 |
|
Shares issued to Board of Directors in lieu of cash (3,188 shares) | | — |
| | 75 |
| | — |
| | — |
| | 75 |
| | — |
| | 75 |
|
Stock-based compensation, net of forfeitures | | (1 | ) | | 5,044 |
| | — |
| | — |
| | 5,043 |
| | — |
| | 5,043 |
|
Cash dividend ($0.30 per share) | | — |
| | — |
| | (15,044 | ) | | — |
| | (15,044 | ) | | — |
| | (15,044 | ) |
Purchase of common stock (420,072 shares) | | (4 | ) | | (10,566 | ) | | — |
| | — |
| | (10,570 | ) | | — |
| | (10,570 | ) |
Balance at June 30, 2017 | | $ | 493 |
| | $ | 50,170 |
| | $ | 310,305 |
| | $ | (40,878 | ) | | $ | 320,090 |
| | $ | 236 |
| | $ | 320,326 |
|
NOTE 9. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table summarizes the changes in accumulated other comprehensive income (loss) by component for the six months ended June 30, 2017 (in thousands):
|
| | | | | | | | | | | |
| Foreign Currency Translation Adjustment | | Pension and Other Post-Employment Liability Adjustment | | Total |
Balance, as of December 31, 2016 | $ | (13,998 | ) | | $ | (29,405 | ) | | $ | (43,403 | ) |
Other comprehensive income before reclassifications | 2,800 |
| | — |
| | 2,800 |
|
Amounts reclassified from accumulated other comprehensive income (loss) | — |
| | (275 | ) | | (275 | ) |
Net current-period other comprehensive income | 2,800 |
| | (275 | ) | | 2,525 |
|
Balance, as of June 30, 2017 | $ | (11,198 | ) | | $ | (29,680 | ) | | $ | (40,878 | ) |
The following reclassifications were made from accumulated other comprehensive income (loss) to the agreement governingcondensed consolidated statements of operations and other comprehensive income (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2017 | | June 30, 2016 | | June 30, 2017 | | June 30, 2016 |
Amortization of pension and other post-employment liability adjustments | | | | | | | |
Prior service credits (1) | $ | (371 | ) | | $ | (280 | ) | | $ | (742 | ) | | $ | (560 | ) |
Actuarial losses (1) | 155 |
| | 61 |
| | 310 |
| | 122 |
|
Total before tax | (216 | ) | | (219 | ) | | (432 | ) | | (438 | ) |
Tax benefit | 78 |
| | 83 |
| | 157 |
| | 166 |
|
Net of tax | $ | (138 | ) | | $ | (136 | ) | | $ | (275 | ) | | $ | (272 | ) |
(1) These accumulated other comprehensive income (loss) components are included in the acquisitioncomputation of HOLLY HUNT®,net periodic pension costs. See Note 3 for additional information.
NOTE 10. EARNINGS PER SHARE
Basic earnings per share excludes the Company maydilutive effect of common shares that could potentially be requiredissued due to make annual contingent purchase price payments.the exercise of stock options and unvested restricted stock and restricted stock units, and is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share includes the effect of shares and potential shares and units issued under the stock incentive plans. The payouts arefollowing table sets forth the reconciliation from basic to dilutive average common shares (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Numerator: | | | | | | | |
Net earnings attributable to Knoll, Inc. stockholders | $ | 12,938 |
| | $ | 21,635 |
| | $ | 28,338 |
| | $ | 39,035 |
|
| | | | | | | |
Denominator: | | | | | | | |
Denominator for basic earnings per shares - weighted-average shares | 48,465 |
| | 48,019 |
| | 48,375 |
| | 47,962 |
|
Effect of dilutive securities: | | | | | | | |
Potentially dilutive shares resulting from stock plans | 912 |
| | 814 |
| | 920 |
| | 752 |
|
Denominator for diluted earnings per share - weighted-average shares | 49,377 |
| | 48,833 |
| | 49,295 |
| | 48,714 |
|
Antidilutive equity awards not included in weighted-average common shares—diluted | — |
| | — |
| | 12 |
| | — |
|
| | | | | | | |
Net earnings per common share attributable to Knoll, Inc. stockholders: | |
| | |
| | |
| | |
|
Basic | $ | 0.27 |
| | $ | 0.45 |
| | $ | 0.59 |
| | $ | 0.81 |
|
Diluted | $ | 0.26 |
| | $ | 0.44 |
| | $ | 0.57 |
| | $ | 0.80 |
|
NOTE 11. INCOME TAXES
The Company’s income tax provision consists of federal, state and foreign income taxes. The tax provisions for the three months ended June 30, 2017 and 2016 were based upon HOLLY HUNT® reaching an annual net sales target,on the estimated effective tax rates applicable for each year throughthe full years ending December 31, 2017 and 2016 and are paid out on or around February 20includes items specifically related to the interim periods. The Company’s effective tax rate was 31.3% and 34.6% for the six months ended June 30, 2017 and 2016, respectively. The decrease in the Company's effective tax rate for the six months ended June 30, 2017 was due primarily to the adoption of ASU 2016-09 in the following calendar year. The Company classifies this as a Level 3 measurement and is requiredthird quarter of 2016, which impacted the accounting treatment of excess tax benefits related to remeasure this liability at fair value on a recurring basis. The fair valuevesting of such contingent purchase price payments, totaling $16.0 million, was determined at the time of acquisition based upon net sales projections for HOLLY HUNT® for 2014, 2015, and 2016. The Company paid $5.0 million of the remaining $11.0 million contingent purchase priceequity awards in the six months ended June 30, 20162017. This resulted in the realization of tax benefits as a result of HOLLY HUNT® achieving the 2015 net sales projections. Excluding the initial recognition of the liability for the contingent purchase price payments and payments madereduction to reduce the liability, any further changesincome tax expense in the fair value would be included within selling, generalquarter. In addition, the effective tax rate was affected by the geographic mix of pretax income and administrative expenses.the varying effective tax rates in the countries and states in which the Company operates.
There were no additional assets or liabilities recorded at fair value on a recurring basis asAs of June 30, 2016 or2017 and December 31, 2015.2016, the Company had unrecognized tax benefits of approximately $0.9 million, respectively. These unrecognized tax benefit amounts would affect the effective tax rate if recognized. As of June 30, 2017, the Company is subject to U.S. Federal Income Tax examination for the tax years 2007 through 2016, and to non-U.S. income tax examination for the tax years 2010 to 2016. In addition, the Company is subject to state and local income tax examinations for the tax years 2007 through 2016.
KNOLL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11.12. SEGMENT INFORMATION
The followingCompany manages its business through its reporting segments: Office, Studio, and Coverings. All unallocated expenses are included within Corporate.
The Office segment includes a complete range of workplace products that address diverse workplace planning paradigms. These products include: systems furniture, seating, storage, tables, desks and KnollExtra® accessories as well as the international sales of North American Office products.
The Studio segment includes KnollStudio®, HOLLY HUNT®, Knoll Europe and DatesWeiser. KnollStudio® products, include iconic seating, lounge furniture, side, cafe and dining chairs as well as conference, training and dining and occasional tables. HOLLY HUNT® is known for high quality residential furniture, lighting, rugs, textiles and leathers. In 2016, HOLLY HUNT® acquired Vladimir Kagan Design Group, a renowned collection of modern luxury furnishings. Knoll Europe, which markets and sells both KnollStudio® and Knoll Office products, manufactures and sells products to customers primarily in Europe. DatesWeiser, known for its sophisticated meeting and conference tables and credenzas, sets a standard for design, quality and technology integration.
The Coverings segment includes KnollTextiles®, Spinneybeck® (including Filzfelt®), and Edelman® Leather. These businesses provide a wide range of customers with high-quality fabrics, felt, leather and related architectural products.
Corporate costs include unallocated costs relating to shared services and general corporate activities such as legal expenses, acquisition expenses, certain finance, human resources, administrative and executive expenses and other expenses that are not directly attributable to an operating segment. Dedicated, direct selling, general and administrative expenses of the segments continue to be included within segment operating profit. Management regularly reviews the costs included in the Corporate function, and believes disclosing such information below categorizes certain financial information intoprovides more visibility and transparency of how the Company's reportable segmentschief operating decision maker reviews the results for the three and six months ended June 30, 2016 and 2015Company.
The tables below present the Company’s segment information with Corporate costs excluded from operating segment results. Prior year amounts have been recast to conform to the current presentation (in thousands):
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 | | 2017 | | 2016 |
SALES | | | | | | | | | | | | | | |
Office | $ | 179,270 |
| | $ | 160,877 |
| | $ | 364,626 |
| | $ | 328,600 |
| $ | 153,042 |
| | $ | 179,270 |
| | $ | 302,874 |
| | $ | 364,626 |
|
Studio | 88,650 |
| | 77,863 |
| | 160,156 |
| | 148,057 |
| 88,039 |
| | 88,650 |
| | 167,112 |
| | 160,156 |
|
Coverings | 26,780 |
| | 29,882 |
| | 54,547 |
| | 58,463 |
| 27,613 |
| | 26,780 |
| | 55,528 |
| | 54,547 |
|
Knoll, Inc. | $ | 294,700 |
| | $ | 268,622 |
| | $ | 579,329 |
| | $ | 535,120 |
| $ | 268,694 |
| | $ | 294,700 |
| | $ | 525,514 |
| | $ | 579,329 |
|
INTERSEGMENT SALES (1) | | | | | | | | | | | | | | |
Office | $ | 488 |
| | $ | 415 |
| | $ | 1,069 |
| | $ | 901 |
| $ | 450 |
| | $ | 488 |
| | $ | 724 |
| | $ | 1,069 |
|
Studio | 1,753 |
| | 1,706 |
| | 3,058 |
| | 3,086 |
| 1,493 |
| | 1,753 |
| | 2,591 |
| | 3,058 |
|
Coverings | 2,008 |
| | 1,317 |
| | 4,255 |
| | 3,242 |
| 649 |
| | 2,008 |
| | 2,600 |
| | 4,255 |
|
Knoll, Inc. | $ | 4,249 |
| | $ | 3,438 |
| | $ | 8,382 |
| | $ | 7,229 |
| $ | 2,592 |
| | $ | 4,249 |
| | $ | 5,915 |
| | $ | 8,382 |
|
OPERATING PROFIT | | | | | | | | | | |
| | | | |
Office | $ | 13,597 |
| | $ | 9,099 |
| | $ | 30,193 |
| | $ | 16,345 |
| |
Office (2) | | $ | 4,395 |
| | $ | 15,794 |
| | $ | 13,171 |
| | $ | 35,627 |
|
Studio | 14,067 |
| | 12,079 |
| | 23,110 |
| | 21,031 |
| 14,919 |
| | 15,627 |
| | 26,558 |
| | 26,110 |
|
Coverings | 5,810 |
| | 7,077 |
| | 12,020 |
| | 13,178 |
| 6,194 |
| | 6,458 |
| | 12,430 |
| | 13,180 |
|
Knoll, Inc.(2) | $ | 33,474 |
| | $ | 28,255 |
| | $ | 65,323 |
| | $ | 50,554 |
| |
Corporate | | (3,278 | ) | | (4,405 | ) | | (6,895 | ) | | (9,594 | ) |
Knoll, Inc.(3) | | $ | 22,230 |
| | $ | 33,474 |
| | $ | 45,264 |
| | $ | 65,323 |
|
(1) Intersegment sales are presented on a cost-plus basis which takes into consideration the effect of transfer prices between legal entities.
(2) Office Operating Profit includes $2.2 million of restructuring charges for the three and six months ended June 30, 2017. The restructuring charges related to headcount rationalization and modernization of equipment. The Company does not expect to incur additional restructuring charges related to these activities.
(3) The Company does not allocate interest expense or other (income) expense, net to the reportable segments.
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 condensedaudited consolidated financial statements.
Forward-looking Statements
This Quarterlyquarterly report on Form 10-Q contains forward-looking statements, principally in the sections entitled “Management’s“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-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, 2015;2016; 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 allegations of patents, copyrights and trademark infringements; violations of environmental laws and regulations; potential labor disruptions; adequacy of our insurance policies; the availability of future capital;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-Q 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 high-end furnishingscommercial and residential furniture, accessories, textiles, fine leathers and designer felt for the workplace and home. We work with clients to create inspired modern interiors. Our commitment to innovationdesign-driven businesses share a reputation for high-quality and modern design has yieldedsophistication offering a comprehensivediversified product portfolio of products and a brand recognized for high quality and a sophisticated image.that endures throughout evolving trends. Our products are targeted at the middle to upper endupper-end of the market and are soldwhere we reach customers primarily in North America and Europe through a direct sales force and a broad network of independent dealers and distribution partners, our direct sales force, our showrooms retailers and websites.our online presence.
Business Highlights
During the last decade, we have diversified our sources of revenue among our varying operating segments. We continue to build Knoll with an eye toward what works for our customers and shareholders: a constellation of high-design, high-margin businesses that leverage our historic relationships with architects, designers and decorators.
Our efforts to diversify our sources of revenue among our operating segments has not detracted from our continued focus on growing and improving the operating performance of our Office segment. We are looking beyond the traditional office product categories of systems, task seating and storage, to furniture that supports activity areas and the in-between spaces where people meet. We believe that our success in traditional office products gives us an advantage throughout the workplace. Our new Rockwell Unscripted collection encompasses every product category ranging from seating and lounge to architectural walls and storage. It addresses the needs of organizations that seek alternatives to the traditional workspace, and is substantially additive to our current product portfolio. In addition to these initiatives, we aim to increase profitability through operational improvements and investments in our physical and technological infrastructure. Our investments in lean manufacturing, combined with continued modernization of our facilities, is allowing us to progressively deliver on this goal.
We believe that over the long runtime our diversification efforts and strategy will continue to result in a more profitable and less cyclical enterprise. At the same time, we have continued to focus on growingThe 2016 acquisitions of DatesWeiser and improving the operating performance of our Office segment. Recent introductions of complementary products like adjustable tables, seating and ergonomic accessories have driven our recent growth in the Office business.
As the workplace continues to evolve and the traditional boundaries between residential and contract blur, we believe our unique combination of office furnishings, KnollStudio® design classics and lounge designs, Spinneybeck | FilzFelt architectural materials and our broad range of Edelman® Leather and KnollTextiles® coverings materials helps us both capture more of our clients' total spend, and improves our profitability.
The changing balance between the allocation of office space between the individual and the group is creating opportunities outside the traditional workstation market. We are also seeing clients incrementally investing in more adjustable and high performance options. This can increase the average selling price of an individual space and, coupled with an increased focus on well-being, also creates opportunities to innovate with new types of products.
We continue to increase our footprint in the residential market throughVladimir Kagan further advance our strategy of showroom expansion, and use this foundationbuilding global capability as a platformsingular go-to resource for growth.high-design workplaces and homes. DatesWeiser plays an integral role in the creation of high performance workplaces as its sophisticated meeting and conference tables and credenzas set a standard for design, quality and technology integration. DatesWeiser products are offered as a compliment of our ‘ancillary’ offerings. Vladimir Kagan's elegant and contemporary designs are leveraged within our HOLLY HUNT®, together with residential opportunities domestically distribution channels to maximize profitability and internationally, gives us exposuregrowth in future years.
We are committed to building a sophisticated clientèle that is pleasedmore efficient and responsive customer centric service culture and technology infrastructure across our organization. Our capital expenditures are reflective of this commitment as we continued to invest in the finestbusiness through technology infrastructure upgrades, continued investments in modern design.our manufacturing facilities focusing on lean initiatives and in our showroom footprint.
Results of Operations
Comparison of Consolidated Results for the Three Months Ended June 30, 20162017 and 20152016
| | | | Three Months Ended June 30, | | 2016 vs. 2015 | | Three Months Ended June 30, | | 2017 vs. 2016 |
| | 2016 | | 2015 | | $ Change | | % Change | | 2017 | | 2016 | | $ Change | | % Change |
| | (Dollars in thousands, except per share data) | | (Dollars in thousands, except per share data) |
Net Sales | | $ | 294,700 |
| | $ | 268,622 |
| | $ | 26,078 |
| | 9.7 | % | | $ | 268,694 |
| | $ | 294,700 |
| | $ | (26,006 | ) | | (8.8 | )% |
Gross profit | | 114,064 |
| | 101,191 |
| | 12,873 |
| | 12.7 | % | | 99,958 |
| | 114,064 |
| | (14,106 | ) | | (12.4 | )% |
Selling, general, and administrative expenses | | 80,590 |
| | 72,936 |
| | 7,654 |
| | 10.5 | % | | 75,578 |
| | 80,590 |
| | (5,012 | ) | | (6.2 | )% |
Restructuring charges | | | 2,150 |
| | — |
| | 2,150 |
| | 100.0 | % |
Operating profit | | 33,474 |
| | 28,255 |
| | 5,219 |
| | 18.5 | % | | 22,230 |
| | 33,474 |
| | (11,244 | ) | | (33.6 | )% |
Interest expense | | 1,307 |
| | 1,851 |
| | (544 | ) | | (29.4 | )% | | 1,859 |
| | 1,307 |
| | 552 |
| | 42.2 | % |
Other expense, net | | 185 |
| | 200 |
| | (15 | ) | | (7.5 | )% | | 229 |
| | 185 |
| | 44 |
| | 23.8 | % |
Income tax expense | | 10,678 |
| | 8,982 |
| | 1,696 |
| | 18.9 | % | | 7,182 |
| | 10,341 |
| | (3,159 | ) | | (30.5 | )% |
Net earnings | | 21,304 |
| | 17,222 |
| | 4,082 |
| | 23.7 | % | | 12,960 |
| | 21,641 |
| | (8,681 | ) | | (40.1 | )% |
Net earnings attributable to Knoll, Inc. stockholders | | 21,298 |
| | 17,239 |
| | 4,059 |
| | 23.5 | % | | 12,938 |
| | 21,635 |
| | (8,697 | ) | | (40.2 | )% |
Net earnings per common share attributable to Knoll, Inc. stockholders: | | | | | | | | | | | | | | | | |
Basic | | $ | 0.44 |
| | $ | 0.36 |
| | $ | 0.08 |
| | 22.2 | % | | $ | 0.27 |
| | $ | 0.45 |
| | $ | (0.18 | ) | | (40.0 | )% |
Diluted | | $ | 0.44 |
| | $ | 0.36 |
| | $ | 0.08 |
| | 22.2 | % | | $ | 0.26 |
| | $ | 0.44 |
| | $ | (0.18 | ) | | (40.9 | )% |
Statistical Data | | | | | | | | | | | | | | | | |
Gross profit % | | 38.7 | % | | 37.7 | % | | | | | | 37.2 | % |
| 38.7 | % | | | | |
Operating profit % | | 11.4 | % | | 10.5 | % | | | | | | 8.3 | % |
| 11.4 | % |
| | | |
Selling, general, and administrative expenses % | | 27.3 | % | | 27.2 | % | | | | | | 28.1 | % | | 27.3 | % | | | | |
Net Sales
Net sales for the three months ended June 30, 20162017 were $294.7$268.7 million, an increasea decrease of $26.1$26.0 million, or 9.7%8.8%, from sales of $268.6$294.7 million for the three months ended June 30, 2015.2016. Net sales for the Office segment were $153.0 million for the three months ended June 30, 2017, a decrease of 14.6%, when compared with the three months ended June 30, 2016. The decrease in the Office segment was a result of lower government sales and fewer large commercial projects. Net sales for the Studio segment were $88.0 million during the three months ended June 30, 2017, a decrease of 0.7%, when compared with the same period of 2016. Growth in HOLLY HUNT® and the incremental sales from DatesWeiser were offset by the decrease in KnollStudio® and Europe. Net sales for the Coverings segment were $27.6 million during the three months ended June 30, 2017, an increase of 3.1%, when compared with the three months ended June 30, 2016. The increase in salesCoverings was largely due to an $18.4 million increasedriven primarily by higher volume in our Office segment sales, where we experienced growth in our core office systems as well as in our recently introduced complementary products, such as adjustable tables and storage products. Our Studio segment sales also increased 13.9% from the same period in the prior year, due primarily to strong sales growth in Europe and KnollStudio North America.Spinneybeck | FilzFelt.
Gross Profit
Gross profit for the three months ended June 30, 20162017 was $114.1$100.0 million, an increasea decrease of $12.9$14.1 million, or 12.7%12.4%, from gross profit of $101.2$114.1 million for the three months ended June 30, 2015.2016. As a percentage of sales, gross profit increaseddecreased from 37.7% for the three months ended June 30, 2015 to 38.7% for the three months ended June 30, 2016.2016 to 37.2% for the three months ended June 30, 2017. This improvementdecrease was driven mainly by the Office segment, where operating efficiencies and improvedlower volume had an unfavorable impact on fixed-cost leverage, from higher volumes were favorable.partially offset by net price realization.
Operating Profit
Operating profit for the three months ended June 30, 20162017 was $33.5$22.2 million, an increasea decrease of $5.2$11.2 million, or 18.5%33.6%, from operating profit of $28.3$33.5 million for the three months ended June 30, 2015.2016. The increasedecrease in operating profit was driven primarily by the Office segment resulting from higherlower sales volume as well as cost improvement benefits.partially offset by reduced performance based incentive accruals and lower sales commissions. Operating profit as a percentagefor the Office segment was $4.4 million, or 2.9% of net sales increased from 10.5% infor the three months ended June 30, 2015 to 11.4% in the2017, a decrease of $11.4 million, or 72.2%, when compared with three months ended June 30, 2016.
Selling, general, and administrative expenses for the three months ended June 30, 20162017 were $80.6$75.6 million, or 27.3%28.2% of sales, compared to $72.9$80.6 million, or 27.2%27.0% of sales, for the three months ended June 30, 2015.2016. The increase in operating expenses wasdecrease is due primarily related to expanded sales and marketing investmentslower incentive accruals from decreased profitability, as well as higher incentive accruals related to increased profitability.lower sales commissions as a result of a reduction in volume in the Office segment.
Interest Expense
Interest expense for the three months ended June 30, 20162017 was $1.3$1.9 million, a decreasean increase of $0.6 million from interest expense of $1.9$1.3 million for the three months ended June 30, 2015.2016. The decreaseincrease in interest expense wasis due primarily to loweran increase in outstanding debt balances.borrowings in the three months ended June 30, 2017 compared to the same period in 2016. During the three months ended June 30, 20162017 and 2015,2016, our weighted average interest rate was approximately 2.4% and 1.9%, respectively.
Other Expense, net
During the three months ended June 30, 2017 and 2016, other expense was $0.2 million. Other expenses are primarily related to foreign exchange losses.
Income Tax Expense
Our effective tax rate was 35.7% for the three months ended June 30, 2017, compared to 32.3% for the three months ended June 30, 2016. The increase in the tax rate was due primarily to a favorable income tax examination ruling received from a non-U.S. income tax jurisdiction during the second quarter of 2016. The tax rate was also affected by the mix of pretax income and the varying effective tax rates in the countries and states in which we operate.
Comparison of Consolidated Results for the Six Months Ended June 30, 2017 and 2016
|
| | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | 2017 vs. 2016 |
| | 2017 | | 2016 | | $ Change | | % Change |
| | (Dollars in thousands, except per share data) |
Net Sales | | $ | 525,514 |
| | $ | 579,329 |
| | $ | (53,815 | ) | | (9.3 | )% |
Gross profit | | 195,632 |
| | 221,828 |
| | (26,196 | ) | | (11.8 | )% |
Selling, general, and administrative expenses | | 148,218 |
| | 156,505 |
| | (8,287 | ) | | (5.3 | )% |
Restructuring expense | | 2,150 |
| | — |
| | 2,150 |
| | 100.0 | % |
Operating profit | | 45,264 |
| | 65,323 |
| | (20,059 | ) | | (30.7 | )% |
Interest expense | | 3,530 |
| | 2,861 |
| | 669 |
| | 23.4 | % |
Other expense (income), net | | 436 |
| | 2,789 |
| | (2,353 | ) | | (84.4 | )% |
Income tax expense | | 12,946 |
| | 20,621 |
| | (7,675 | ) | | (37.2 | )% |
Net earnings | | 28,352 |
| | 39,052 |
| | (10,700 | ) | | (27.4 | )% |
Net earnings attributable to Knoll, Inc. stockholders | | 28,338 |
| | 39,035 |
| | (10,697 | ) | | (27.4 | )% |
Net earnings per common share attributable to Knoll, Inc. stockholders: | | | | | | | | |
Basic | | $ | 0.59 |
| | $ | 0.81 |
| | $ | (0.22 | ) | | (27.2 | )% |
Diluted | | $ | 0.57 |
| | $ | 0.80 |
| | $ | (0.23 | ) | | (28.8 | )% |
Statistical Data | | | | | | | | |
Gross profit % | | 37.2 | % | | 38.3 | % | | | | |
Operating profit % | | 8.6 | % | | 11.3 | % | | | | |
Selling, general, and administrative expenses % | | 28.2 | % | | 27.0 | % | | | | |
Net Sales
Net sales for the six months ended June 30, 2017 were $525.5 million, a decrease of $53.8 million, or 9.3%, from sales of $579.3 million for the six months ended June 30, 2016. The decrease in sales was due to a $61.8 million decrease in our Office segment sales resulting from a reduction in the quantity and lower average size of project opportunities, lower government sales, and a limited ship week at the end of March to facilitate the first phase of the implementation of a new enterprise resource planning system. The decrease in sales in our Office segment were partially offset by our Studio segment, where sales increased 4.3% from the same period in the prior year. The increase in the Studio segment was driven by strong sales growth in HOLLY HUNT® and incremental sales from DatesWeiser which was acquired in the fourth quarter of 2016.
Gross Profit
Gross profit for the six months ended June 30, 2017 was $195.6 million, a decrease of $26.2 million, or 11.8%, from gross profit of $221.8 million for the six months ended June 30, 2016. As a percentage of sales, gross profit decreased from 38.3% for the six months ended June 30, 2016 to 37.2% for the six months ended June 30, 2017. This decrease was driven primarily by the Office segment, where lower volume had an unfavorable impact on fixed-cost leverage, partially offset by net price realization.
Operating Profit
Operating profit for the six months ended June 30, 2017 was $45.3 million, a decrease of $20.1 million, or 30.7%, from operating profit of $65.3 million for the six months ended June 30, 2016. The decrease in operating profit was driven primarily by the Office segment resulting from lower sales volume partially offset by reduced performance based incentive accruals and lower sales commissions. Operating profit as a percentage of sales decreased from 11.3% in the six months ended June 30, 2016 to 8.6% in the six months ended June 30, 2017.
Selling, general, and administrative expenses for the six months ended June 30, 2017 were $148.2 million, or 28.2% of sales, compared to $156.5 million, or 27.0% of sales, for the six months ended June 30, 2016. The decrease is due primarily to lower incentive accruals from decreased profitability as well as lower sales commissions as a result of a reduction in volume in the Office segment, partially offset by increased investments in training and costs related to the rollout of the Rockwell Unscripted product line.
Interest Expense
Interest expense for the six months ended June 30, 2017 was $3.5 million, an increase of $0.7 million from interest expense of $2.9 million for the six months ended June 30, 2016. During the six months ended June 30, 2017 and 2016, our weighted average interest rate was approximately 1.9%2.3% and 2.1%, respectively.
Other Expense, net
Other expense for the threesix months ended June 30, 2017 was $0.4 million a decrease of $2.4 million from $2.8 million for the six months ended June 30, 2016. Other expense for the six months ended June 30, 2017 was primarily related to foreign exchange losses. Other expense for the six months ended June 30, 2016 was $0.2 million compared to other expense for the three months ended June 30, 2015 of $0.2 million. Other expense for the three months ended June 30, 2016 and 2015 was primarily related to foreign exchangeexchanges losses that resulted from the revaluation of intercompany balances between our Canadian and U.S. entities.
Income Tax Expense
Our effective tax rate was 33.0%31.3% for the threesix months ended June 30, 2016,2017, compared to 34.3%34.6% for the threesix months ended June 30, 2015.2016. The decreasechange in our effectivethe tax rate forwas due primarily to the three months ended June 30,early adoption of ASU 2016-09 in the third quarter of 2016, was a resultwhich impacted the accounting treatment of the geographicvesting of a large quantity of equity awards. This resulted in the realization of tax benefits recognized as a reduction of income tax expense. In addition, the tax rate was affected by the mix of pretax income and the varying effective tax rates in the countries and states in which we operate, and a favorable income tax examination ruling received from a non-U.S. income tax jurisdiction.
Comparison of Consolidated Results for the Six Months Ended June 30, 2016 and 2015
|
| | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | 2016 vs. 2015 |
| | 2016 | | 2015 | | $ Change | | % Change |
| | (Dollars in thousands, except per share data) |
Net Sales | | $ | 579,329 |
| | $ | 535,120 |
| | $ | 44,209 |
| | 8.3 | % |
Gross profit | | 221,828 |
| | 196,500 |
| | 25,328 |
| | 12.9 | % |
Selling, general, and administrative expenses | | 156,505 |
| | 145,946 |
| | 10,559 |
| | 7.2 | % |
Operating profit | | 65,323 |
| | 50,554 |
| | 14,769 |
| | 29.2 | % |
Interest expense | | 2,861 |
| | 3,736 |
| | (875 | ) | | (23.4 | )% |
Other expense (income), net | | 2,789 |
| | (6,957 | ) | | 9,746 |
| | (140.1 | )% |
Income tax expense | | 21,100 |
| | 19,118 |
| | 1,982 |
| | 10.4 | % |
Net earnings | | 38,573 |
| | 34,657 |
| | 3,916 |
| | 11.3 | % |
Net earnings attributable to Knoll, Inc. stockholders | | 38,556 |
| | 34,682 |
| | 3,874 |
| | 11.2 | % |
Net earnings per common share attributable to Knoll, Inc. stockholders: | | | | | | | | |
Basic | | $ | 0.80 |
| | $ | 0.73 |
| | $ | 0.07 |
| | 9.6 | % |
Diluted | | $ | 0.79 |
| | $ | 0.72 |
| | $ | 0.07 |
| | 9.7 | % |
Statistical Data | | | | | | | | |
Gross profit % | | 38.3 | % | | 36.7 | % | | | | |
Operating profit % | | 11.3 | % | | 9.4 | % | | | | |
Selling, general, and administrative expenses % | | 27.0 | % | | 27.3 | % | | | | |
Net Sales
Net sales for the six months ended June 30, 2016 were $579.3 million, an increase of $44.2 million, or 8.3%, from sales of $535.1 million for the six months ended June 30, 2015. The increase in sales was largely due to a $36.0 million increase in our Office segment sales where we experienced growth in our core office systems as well as in our recently introduced complementary products, like adjustable tables and storage products. Our Studio segment sales also increased 8.2% from the same period in the prior year, as all of our Studio segment businesses continued to grow.operate.
Gross Profit
Gross profit for the six months ended June 30, 2016 was $221.8 million, an increase of $25.3 million, or 12.9%, from gross profit of $196.5 million for the six months ended June 30, 2015. As a percentage of sales, gross profit increased from 36.7% for the six months ended June 30, 2015 to 38.3% for the six months ended June 30, 2016. The increase in gross profit as a percent of sales was driven primarily by the Office segment, where operating efficiencies resulting from our supply chain initiatives, capital investments and an improved fixed-cost basis that allowed us to leverage higher volumes to produce strong margin improvement.
Operating Profit
Operating profit for the six months ended June 30, 2016 was $65.3 million, an increase of $14.8 million, or 29.2%, from operating profit of $50.6 million for the six months ended June 30, 2015. The increase in operating profit was driven primarily by the Office segment resulting from higher volume as well as cost improvement benefits. Operating profit as a percentage of sales increased from 9.4% in the six months ended June 30, 2015 to 11.3% in the six months ended June 30, 2016.
Selling, general, and administrative expenses for the six months ended June 30, 2016 were $156.5 million, or 27.0% of sales, compared to $145.9 million, or 27.3% of sales, for the six months ended June 30, 2015. The increase in operating expenses was related to increased costs from marketing investments, additional headcount, and higher incentive accruals related to increased profitability.
Interest Expense
Interest expense for the six months ended June 30, 2016 was $2.9 million, a decrease of $0.8 million from interest expense of $3.7 million for the six months ended June 30, 2015. The decrease in interest expense was due primarily to lower outstanding debt balances. During both the six months ended June 30, 2016 and 2015, our weighted average interest rates were approximately 2.1%.
Other Expense (Income), net
Other expense for the six months ended June 30, 2016 was $2.8 million compared to other income for the six months ended June 30, 2015 of $7.0 million. Other expense for the six months ended June 30, 2016 was primarily related to foreign exchange losses that resulted from the revaluation of intercompany balances between our Canadian and U.S. entities. The gain in the six months ended June 30, 2015 was due to the settlement of an outstanding receivable with our Canadian subsidiary.
Income Tax Expense
Our effective tax rate was 35.4% for the six months ended June 30, 2016, compared to 35.6% for the six months ended June 30, 2015. The decrease in our effective tax rate for the six months ended June 30, 2016 was a result of the geographic mix of pretax income and the varying effective tax rates in the countries and states in which we operate, and a favorable income tax examination ruling received from a non-U.S. income tax jurisdiction.
Segment Reporting
We manage our business through threeour reporting segments: (1) Office, (2) Studio, and (3) Coverings. TheAll unallocated expenses are included within Corporate.
Our Office segment includes a complete range of workplace products that address diverse workplace planning paradigms. These products include: systems furniture, seating, storage, tables, desks and KnollExtra® ergonomic accessories as well as the international sales of our North American Office products. The
Our Studio segment includes ourKnollStudio®, HOLLY HUNT®, Knoll Europe and DatesWeiser. KnollStudio® division, the Company's European subsidiaries which primarily sell KnollStudio products, and Holly Hunt Enterprises, Inc. The KnollStudio portfolio includes a range ofinclude iconic seating, lounge seating,furniture, side, cafécafe and dining chairs barstools as well as conference, training and dining and occasional tables. Known for style and quality, HOLLY HUNT® produces and showcases custom made product including indoor and outdooris known for high quality residential furniture, lighting, rugs, textiles and leathers. TheIn 2016, HOLLY HUNT® acquired Vladimir Kagan Design Group, a renowned collection of modern luxury furnishings. Knoll Europe, which distributes both KnollStudio® and Knoll Office products, manufactures and sells products to customers primarily in Europe. DatesWeiser, known for its sophisticated meeting and conference tables and credenzas, sets a standard for design, quality and technology integration.
Our Coverings segment includes KnollTextiles®, Spinneybeck | FilzFelt,Spinneybeck® (including Filzfelt®), and Edelman® Leather. These businesses serveprovide a wide range of customers offeringwith high-quality textiles,fabrics, felt, leather and leather.related architectural products.
In 2016, we revised our segment presentation to segregate Corporate costs. We believe this facilitates improved communication as we report segment results and better aligns with how we view and operate the Company. Corporate costs represent the portion of unallocated expenses relating to shared services and general corporate functions including, but not limited to, legal expenses, acquisition expenses, certain finance, human resources, administrative and executive expenses and other expenses that are not directly attributable to an operating segment. Dedicated, direct selling, general and administrative expenses of the segments continue to be included within segment operating profit. We regularly review the costs included in the Corporate function, and believe disclosing such information provides more visibility and transparency of how our chief operating decision maker reviews the results for the Company.
The comparisons of segment results found below present our segment information with Corporate costs excluded from operating segment results. Prior year amounts have been recast to conform to the current presentation.
Comparison of Segment Results for the Three Months Ended June 30, 20162017 and 20152016
| | | | Three Months Ended June 30, | | 2016 vs. 2015 | | Three Months Ended June 30, | | 2017 vs. 2016 |
| | 2016 | | 2015 | | $ Change | | % Change | | 2017 | | 2016 | | $ Change | | % Change |
| | (Dollars in thousands) | | (Dollars in thousands) |
SALES | | | | | | | | | | | | | | | | |
Office | | $ | 179,270 |
| | $ | 160,877 |
| | $ | 18,393 |
| | 11.4 | % | | $ | 153,042 |
| | $ | 179,270 |
| | $ | (26,228 | ) | | (14.6 | )% |
Studio | | 88,650 |
| | 77,863 |
| | 10,787 |
| | 13.9 | % | | 88,039 |
| | 88,650 |
| | (611 | ) | | (0.7 | )% |
Coverings | | 26,780 |
| | 29,882 |
| | (3,102 | ) | | (10.4 | )% | | 27,613 |
| | 26,780 |
| | 833 |
| | 3.1 | % |
Knoll, Inc. | | $ | 294,700 |
| | $ | 268,622 |
| | $ | 26,078 |
| | 9.7 | % | | $ | 268,694 |
| | $ | 294,700 |
| | $ | (26,006 | ) | | (8.8 | )% |
OPERATING PROFIT | | | | | | | | | | | | | | | | |
Office | | $ | 13,597 |
| | $ | 9,099 |
| | $ | 4,498 |
| | 49.4 | % | | $ | 4,395 |
| | $ | 15,794 |
| | $ | (11,399 | ) | | (72.2 | )% |
Studio | | 14,067 |
| | 12,079 |
| | 1,988 |
| | 16.5 | % | | 14,919 |
| | 15,627 |
| | (708 | ) | | (4.5 | )% |
Coverings | | 5,810 |
| | 7,077 |
| | (1,267 | ) | | (17.9 | )% | | 6,194 |
| | 6,458 |
| | (264 | ) | | (4.1 | )% |
Corporate | | | (3,278 | ) | | (4,405 | ) | | 1,127 |
| | (25.6 | )% |
Knoll, Inc. (1) | | $ | 33,474 |
| | $ | 28,255 |
| | $ | 5,219 |
| | 18.5 | % | | $ | 22,230 |
| | $ | 33,474 |
| | $ | (11,244 | ) | | (33.6 | )% |
(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 three months ended June 30, 20162017 were $179.3$153.0 million, an increasea decrease of $18.4$26.2 million, or 11.4%14.6%, when compared with the three months ended June 30, 2015.2016. The increasedecrease in the Office segment was led by continued growth in our core systems portfolio, as well as increases in complementary products.a result of lower government sales and fewer large commercial projects. Operating profit for the Office segment in the three months ended June 30, 20162017 was $13.6$4.4 million, an increasea decrease of $4.5$11.4 million, or 49.4%72.2%, when compared with the three months ended June 30, 2015.2016. The increasedecrease in operating profit for the Office segment was mainly the result of higherdue primarily to lower sales volume as well as cost improvement benefits from continued efficiency initiatives.partially offset by reduced performance-based incentive accruals and lower sales commissions.
Studio
Net sales for the Studio segment for the three months ended June 30, 20162017 were $88.6$88.0 million, an increasea decrease of $10.7$0.6 million, or 13.9%0.7%, when compared with the three months ended June 30, 2015. The increase2016. Double digit growth at HOLLY HUNT® and the incremental sales from DatesWeiser were offset by the decreases in the Studio segment was led by Europecontract shipments at both KnollStudio® and KnollStudio in North America, however, all of our Studio segment businesses continued to grow in the three months ended June 30, 2016.Europe. Operating profit for the Studio segment in the three months ended June 30, 20162017 was $14.1$14.9 million, an increasea decrease of $2.0$0.7 million, or 16.5%4.5%, when compared with the three months ended June 30, 2015.2016. The increasedecrease in operating profit was driven by increased salesdecreased volume, foreign exchange benefits and cost improvement efficiencies.partially offset by net price realization.
Coverings
Net sales for the Coverings segment for the three months ended June 30, 20162017 were $26.8$27.6 million, a decreasean increase of $3.1$0.8 million, or 10.4%3.1%, when compared with the three months ended June 30, 2015. Continued year-over-year growth2016. The increase in Coverings was driven primarily by higher volume in the Spinneybeck |FilzFelt sales was offset by weakness at KnollTextiles and Edelman.business. Operating profit for the Coverings segment in the three months ended June 30, 20162017 was $5.8$6.2 million, a decrease of $1.3$0.3 million, or 17.9%4.1%, when compared with the three months ended June 30, 2015.2016.
Corporate
Corporate costs for the three months ended June 30, 2017 were $3.3 million, a decrease of $1.1 million, or 25.6%, when compared with the three months ended June 30, 2016. The decrease was driven primarily by reduced costs associated with employee benefits and incentive compensation.
Comparison of Segment Results for the Six Months Ended June 30, 20162017 and 20152016
| | | | Six Months Ended June 30, | | 2016 vs. 2015 | | Six Months Ended June 30, | | 2017 vs. 2016 |
| | 2016 | | 2015 | | $ Change | | % Change | | 2017 | | 2016 | | $ Change | | % Change |
| | (Dollars in thousands) | | (Dollars in thousands) |
SALES | | | | | | | | | | | | | | | | |
Office | | $ | 364,626 |
| | $ | 328,600 |
| | $ | 36,026 |
| | 11.0 | % | | $ | 302,874 |
| | $ | 364,626 |
| | $ | (61,752 | ) | | (16.9 | )% |
Studio | | 160,156 |
| | 148,057 |
| | 12,099 |
| | 8.2 | % | | 167,112 |
| | 160,156 |
| | 6,956 |
| | 4.3 | % |
Coverings | | 54,547 |
| | 58,463 |
| | (3,916 | ) | | (6.7 | )% | | 55,528 |
| | 54,547 |
| | 981 |
| | 1.8 | % |
Knoll, Inc. | | $ | 579,329 |
| | $ | 535,120 |
| | $ | 44,209 |
| | 8.3 | % | | $ | 525,514 |
| | $ | 579,329 |
| | $ | (53,815 | ) | | (9.3 | )% |
OPERATING PROFIT | | | | | | | | | | | | | | | | |
Office | | $ | 30,193 |
| | $ | 16,345 |
| | $ | 13,848 |
| | 84.7 | % | | $ | 13,171 |
| | $ | 35,627 |
| | $ | (22,456 | ) | | (63.0 | )% |
Studio | | 23,110 |
| | 21,031 |
| | 2,079 |
| | 9.9 | % | | 26,558 |
| | 26,110 |
| | 448 |
| | 1.7 | % |
Coverings | | 12,020 |
| | 13,178 |
| | (1,158 | ) | | (8.8 | )% | | 12,430 |
| | 13,180 |
| | (750 | ) | | (5.7 | )% |
Corporate | | | (6,895 | ) | | (9,594 | ) | | 2,699 |
| | (28.1 | )% |
Knoll, Inc. (1) | | $ | 65,323 |
| | $ | 50,554 |
| | $ | 14,769 |
| | 29.2 | % | | $ | 45,264 |
| | $ | 65,323 |
| | $ | (20,059 | ) | | (30.7 | )% |
(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 six months ended June 30, 20162017 were $364.6$302.9 million, an increasea decrease of $36.0$61.8 million, or 11.0%16.9%, when compared with the six months ended June 30, 2015.2016. The increasedecrease in the Office segment was led by complementary products including our height-adjustable tablesa result of lower government sales and storage products, as well as solid growth in our core Office systems portfolio.fewer large commercial projects. Operating profit for the Office segment in the six months ended June 30, 20162017 was $30.2$13.2 million, an increasea decrease of $13.8$22.5 million, or 84.7%63.0%, when compared with the six months ended June 30, 2015.2016. The increasedecrease in operating profit for the Office segment was mainly the result of higherdue primarily to lower sales volume as well as cost improvement benefits from continued efficiency initiatives.partially offset by reduced performance based incentive accruals and lower sales commissions.
Studio
Net sales for the Studio segment for the six months ended June 30, 20162017 were $160.2$167.1 million, an increase of $12.1$7.0 million, or 8.2%4.3%, when compared with the six months ended June 30, 2015.2016. This increase was primarily driven by strong growth at HOLLY HUNT, however, all of our Studio segment business continued to growHUNT® and incremental sales from DatesWeiser, offset by the decreases in the six months ended June 30, 2016.contract shipments at KnollStudio®. Operating profit for the Studio segment in the six months ended June 30, 20162017 was $23.1$26.6 million, an increase of $2.1$0.4 million, or 9.9%1.7%, when compared with the six months ended June 30, 2015.2016. The increase in operating profit was driven primarily by increased sales volume, cost improvement efficiencies, increased net price realization, andpartially offset by foreign exchange benefits.exchange.
Coverings
Net sales for the Coverings segment for the six months ended June 30, 20162017 were $54.5$55.5 million, a decreasean increase of $3.9$1.0 million, or 6.7%1.8%, when compared with the six months ended June 30, 2015. Continued year-over-year growth2016. The increase in Coverings was driven primarily by higher volume in the Spinneybeck |FilzFelt sales was offset by weakness at KnollTextiles and Edelman.business. Operating profit for the Coverings segment in the six months ended June 30, 20162017 was $12.0$12.4 million, a decrease of $1.2$0.8 million, or 8.8%5.7%, when compared with the six months ended June 30, 2015.2016.
Corporate
Corporate costs for the six months ended June 30, 2017 were $6.9 million, a decrease of $2.7 million, or 28.1%, when compared with the six months ended June 30, 2016. The decrease was driven primarily by reduced costs associated with employee benefits and incentive compensation, partially offset by an increase in stock based compensation expense.
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, |
| 2016 | | 2015 |
| (in thousands) |
Cash provided by operating activities | $ | 45,677 |
| | $ | 7,442 |
|
Cash used in investing activities | (15,057 | ) | | (12,670 | ) |
Cash used in financing activities | (32,848 | ) | | (1,169 | ) |
Effect of exchange rate changes on cash and cash equivalents | 1,584 |
| | (2,282 | ) |
Net decrease in cash and cash equivalents | (644 | ) | | (8,679 | ) |
Cash and cash equivalents at beginning of period | 4,192 |
| | 19,021 |
|
Cash and cash equivalents at end of period | 3,548 |
| | 10,342 |
|
|
| | | | | | | |
| Six Months Ended June 30, |
| 2017 | | 2016 |
| (in thousands) |
Cash provided by operating activities | $ | 32,238 |
| | $ | 46,339 |
|
Capital expenditures, net | (20,756 | ) | | (15,057 | ) |
Purchase of common stock for treasury | (10,570 | ) | | (3,903 | ) |
Proceeds from credit facilities | 214,000 |
| | 173,500 |
|
Repayment of credit facilities | (199,000 | ) | | (185,500 | ) |
Payment of dividends | (15,729 | ) | | (14,727 | ) |
Contingent purchase price payment | (6,000 | ) | | (5,000 | ) |
Cash used in financing activities | (16,748 | ) | | (33,510 | ) |
We have historically funded our business through cash generated from operations, supplemented by debt borrowings. Available cash is primarily used for our working capital needs, ongoing operations, capital expenditures, the payment of quarterly dividends, and the repurchase of shares. Our investmentCapital expenditures are related primarily to investments in capital expenditures shows our commitmentassets that help to improving ourimprove operating efficiency, innovation and modernization, showroom refreshes and includes leasehold improvements fortechnology infrastructure. During the six months ended June 30, 2017, we made quarterly dividend payments of $0.30 per share, returning $14.6 million of cash to our showrooms, new product tooling, manufacturing equipment and technology.shareholders. In addition to our quarterly dividend payments, we also paid accrued dividends on vested shares of $1.1 million.
Cash provided by operating activities was $45.7$32.2 million for the six months ended June 30, 20162017 compared to $7.4$46.3 million for the six months ended June 30, 2015.2016. For the six months ended June 30, 2017, cash provided by operating activities consisted primarily of $45.5 million from net income and various non-cash charges, including $12.6 million of depreciation and amortization and $5.0 million of stock based compensation, partially offset by $13.3 million of unfavorable changes in assets and liabilities driven primarily by incentive compensation payments, increased inventory purchases and a reduction of benefits liabilities. For the six months ended June 30, 2016, cash provided by operating activities consisted primarily of $58.7$59.2 million from net income and various non-cash charges, including $11.2 million of depreciation and amortization and $4.6 million of stock based compensation, partially offset by $13.0$12.8 million of unfavorable changes in assets and liabilities.
During the six months ended June 30, 2017 and 2016, we used $20.8 million and $15.1 million of cash for capital expenditures, respectively. The capital expenditures are reflective of our continued commitment to enhance and modernize our sales, manufacturing and information technology infrastructure.
During the six months ended June 30, 2017, we used cash of $10.6 million for the purchase of common stock to satisfy employee tax withholding requirements related to the vesting of restricted shares, and $6.0 million of a contingent purchase price payment related to an earn-out for the HOLLY HUNT® acquisition in 2014. The Company also used $15.7 million of cash to pay dividends, of which $1.1 million was for accrued dividends on vested shares in addition to quarterly dividend payments of $0.30 per share, returning $14.6 million of cash to our shareholders. For the six months ended June 30, 2015, cash provided by operating activities consisted of $43.6 million from net income and various non-cash charges, partially offset by $36.22016, we used $14.7 million of unfavorable changes in assets and liabilities. Working capital needs for the six months ended June 30, 2016 included inventory increases in the Office segment relatedcash to the introduction of complementary products, inventory increases in the Studio segment for the expansion of a HOLLY HUNT showroom, andfund dividend payments to improve in-stock quick-ship programs on certain HOLLY HUNT offerings.
Cash used in investing activities was $15.1shareholders, $5.0 million for the six months ended June 30, 2016 compared to $12.7HOLLY HUNT® contingent purchase price payment, and $3.9 million for the six months ended June 30, 2015. Cash used in investing activities consisted of capital expenditures for both the six months ended June 30, 2016 and 2015.share repurchases.
Cash used in financing activities was $32.8 million for the six months ended June 30, 2016 compared to $1.2 million for the six months ended June 30, 2015. The increase in cash used in financing activities was the result of a $12.0 million net repayment of our revolving credit facilities in the six months ended June 30, 2016 compared to $16.0 million net proceeds from our revolving credit facilities in the six months ended June 30, 2015. Additionally, we made dividends payments of $14.7 million and $11.5 million in the six months ended June 30, 2016 and 2015, respectively. The increase in dividend payments was the result of increasing our quarterly dividends from $0.12 to $0.15 per share in the fourth quarter of 2015.
We use our 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. As of June 30, 2016 and December 31, 2015, there was approximately $210.0 million and $222.0 million, respectively, outstanding under our credit facility.availability at such time. Borrowings under the credit facility may be repaid at any time, but no later than May 2019. See Note 12 of the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016 for further information regarding this facility. The combination of increased debt levels and a reduction of EBITDA caused leverage to increase from 1.37 at December 31, 2016 to 1.57 at June 30, 2017. The calculation of our leverage ratio under our credit facility includes the use of adjusted EBITDA, a non-GAAP financial measure. For details on the leverage ratio calculations, see “Reconciliation of Non-GAAP Financial Measures” below.
Our credit facility requires that we comply with two financial covenants, consolidated leverage ratio, defined as the ratio of total indebtedness to consolidated EBITDA (as defined in our credit agreement) and consolidated interest coverage ratio, defined as the ratio of our consolidated EBITDA (as defined in our credit agreement) to our consolidated interest expense. Our consolidated leverage ratio cannot exceed 4.0 to 1, and our consolidated interest coverage ratio must be a minimum of 3.0 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, 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 credit facility, will be sufficient to fund 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 credit facility could be reduced if our trailing twelve month consolidated EBITDA (as defined by our credit agreement) declines significantly. Future debt payments may be paid out of cash flows from operations, from future refinancing of our debt or from equity issuances. Our ability to make scheduled payments of principal, pay interest on or to refinance our indebtedness, satisfy our other debt obligations and to pay dividends to stockholders will depend upon our future operating performance, which is affected by general economic, financial, competitive, legislative, regulatory, business and other factors beyond our control.
Reconciliation of Non-GAAP Financial Measures
This quarterly report on Form 10-Q contains certain non-GAAP financial measures. A “non-GAAP financial measure” is a numerical measure of a company's financial performance that excludes or includes amounts so as to be different than the most directly comparable measure calculated and presented in accordance with U.S. generally accepted accounting principles (“GAAP”). We present in the statements of income, balance sheets, or statements of cash flow of the company. These non-GAAP financial measures are presented because we consider themmanagement uses this information to be important supplemental measures of our performancemonitor and believe them to beevaluate financial results and trends. Therefore, management believes this information is also useful to display ongoing results from operations distinct from items that are infrequent or not indicative of our operating performance.for investors. Pursuant to applicable reporting requirements, the Companycompany has provided reconciliations below of non-GAAP financial measures to the most directly comparable GAAP measure.
The non-GAAP financial measures presented within this quarterly report on Form 10-Q are Last Twelve Months (“LTM”) Adjusted EBITDA. These non-GAAP measures are not indicators of our financial performance under GAAP and should not be considered as an alternative to the applicable GAAP measure. These non-GAAP measures have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. In addition, in evaluating these non-GAAP measures, you should be aware that in the future we may incur adjustmentsexpenses similar to thosethe adjustments in this presentation. Our presentation of these non-GAAP measures should not be construed as an inference that our future results will be unaffected by unusual or infrequent items. We compensate for these limitations by providing equal prominence of our GAAP results and using non-GAAP measures only as supplemental presentations.
The following table reconciles net earnings to adjusted EBITDA and computes our bank leverage calculations for the periods shown. The bank leverage calculation is in accordance with our Second Amended and Restated Credit Agreement dated May 20, 2014.
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| | June 30, 2015 | | September 30, 2015 | | December 31, 2015 | | March 31, 2016 | | June 30, 2016 |
| | (in millions) |
Debt Levels (1) | | $ | 290.7 |
| | $ | 274.2 |
| | $ | 238.7 |
| | $ | 233.7 |
| | $ | 221.7 |
|
LTM Net Earnings | | 62.6 |
| | 64.8 |
| | 66.0 |
| | 65.8 |
| | 69.3 |
|
LTM Adjustments | | | | | | | | | | |
Interest | | 6.8 |
| | 6.6 |
| | 6.1 |
| | 6.2 |
| | 6.2 |
|
Taxes | | 37.2 |
| | 39.1 |
| | 37.5 |
| | 37.8 |
| | 39.3 |
|
Depreciation and Amortization | | 21.1 |
| | 21.2 |
| | 21.3 |
| | 21.3 |
| | 21.3 |
|
Non-cash items and Other (2) | | 3.3 |
| | 6.0 |
| | 12.5 |
| | 21.9 |
| | 22.4 |
|
LTM Adjusted EBITDA | | $ | 131.0 |
| | $ | 137.7 |
| | $ | 143.4 |
| | $ | 153.0 |
| | $ | 158.5 |
|
Bank Leverage Calculation (3) | | 2.22 |
| | 1.99 |
| | 1.67 |
| | 1.53 |
| | 1.40 |
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(1) Outstanding debt levels include outstanding letters of credit and guarantee obligations. Excess cash over $15.0 million reduces outstanding debt per the terms of our credit facility, a copy of which was filed with the Securities and Exchange Commission on May 21, 2014.
(2) Non-cash items include, but are not limited to, an intangible asset impairment charge, a pension settlement and other postretirement benefit curtailment, stock-based compensation expenses, unrealized gains and losses on foreign exchange, and restructuring charges.
(3) Debt divided by LTM (Last Twelve Months) adjusted EBITDA, as calculated in accordance with our credit facility. |
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| | 6/30/2016 | | 9/30/2016 | | 12/31/2016 | | 3/31/2017 | | 6/30/2017 |
| | ($ in millions) |
Debt Levels (1) | | $ | 221.7 |
| | $ | 206.7 |
| | $ | 231.8 |
| | $ | 249.8 |
| | $ | 240.4 |
|
LTM Net Earnings | | 69.3 |
| | 74.1 |
| | 82.1 |
| | 80.1 |
| | 72.8 |
|
LTM Adjustments | | | | | | | | | | |
Interest | | 6.2 |
| | 5 |
| | 4.7 |
| | 4.9 |
| | 5.4 |
|
Taxes | | 39.3 |
| | 39.6 |
| | 45.4 |
| | 40.9 |
| | 38.5 |
|
Depreciation and Amortization | | 21.3 |
| | 22.5 |
| | 23 |
| | 23.5 |
| | 24.4 |
|
Non-cash items and Other (2) | | 22.4 |
| | 23.8 |
| | 13.4 |
| | 13.3 |
| | 12.0 |
|
LTM Adjusted EBITDA | | $ | 158.5 |
| | $ | 165.0 |
| | $ | 168.6 |
| | $ | 162.7 |
| | $ | 153.1 |
|
Bank Leverage Calculation (3) | | 1.40 |
| | 1.25 |
| | 1.37 |
| | 1.53 |
| | 1.57 |
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(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. |
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(2) Non-cash items and Other includes, but is not limited to, intangible asset impairment charges, pension settlements and other post-employment benefit curtailments, stock-based compensation expenses, unrealized gains and losses on foreign exchange, and restructuring charges. |
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(3) Debt divided by LTM Adjusted EBITDA, as calculated in accordance with our credit facility. |
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 non-exchange-traded contracts. As a result, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.
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, 2015.2016.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We provided a discussion of our market risk in Part II, Item 7A, of our Annual Report on Form 10-K for the year ended December 31, 2015.2016. There have been no substantive changes in our market risk described in our Annual Report on Form 10-K except for the items noted below. During the normal course of business, we are routinely subjected to market risk associated with interest rate movements and foreign currency exchange rate movements. Interest rate risk arises from our debt obligations and foreign currency exchange rate risk arises from our non-U.S. operations and purchases of inventory from foreign suppliers.
We also have risk in our exposure to certain materials and transportation costs. Steel, leather, wood products and plastics are all used in our products. For the six months ended June 30, 2016,2017, we estimated that materials deflationinflation was approximately $0.7$2.2 million and transportation deflation was less than $0.1 million. During the six months ended June 30, 2015,2016, we estimated that materials deflation was approximately $0.7 million and transportation inflation were approximately $1.6 million and $0.3was less than $0.1 million, respectively. We continue to work to offset price increases in raw materials and transportation through our global sourcing initiatives, cost improvements and price increases to our products.
Interest Rate Risk
We have variable rate debt obligations that are denominated in U.S. dollars. A change in interest rates will impact the interest costs incurred and cash paid on the variable rate debt. During both the six months ended June 30, 20162017 and 2015,2016, our weighted average interest rates were approximately 2.3% and 2.1%., respectively.
Foreign Currency Exchange Rate Risk
We manufacture our products in the United States, Canada and Italy, and sell our products primarily in those markets as well as in other European countries. Our foreign sales and certain expenses are transacted in foreign currencies. Our production costs, profit margins and competitive position are affected by the strength of the currencies in countries where we manufacture or purchase goods relative to the strength of the currencies in countries where our products are sold. Additionally, as our reporting currency is the U.S. dollar, our financial position is affected by the strength of the currencies in countries where we have operations relative to the strength of the U.S. dollar. The principal foreign currencies in which we conduct business are the Canadian dollar and the Euro. Approximately 11.6%13.1% and 11.5%11.6% of our revenues in the six months ended June 30, 20162017 and 2015,2016, respectively, and 27.7%27.1% and 27.1%27.7% of our cost of goods sold in the six months ended June 30, 20162017 and 2015,2016, respectively, were denominated in currencies other than the U.S. dollar. Foreign currency exchange rate fluctuations resulted in $0.5 million and $3.1 million of translation losses and $7.0 million of translation gains for the six months ended June 30, 2017 and 2016, and 2015, respectively.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. We, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 as of the end of the period covered by this report (March 31, 2016)(June 30, 2017) ("Disclosure Controls"). Based upon the Disclosure Controls evaluation, our principal executive officer and principal financial officer have concluded that the Disclosure Controls are effective in reaching a reasonable level of assurance that (i) information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and (ii) information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting. There have beenDuring the second quarter of 2017, Knoll implemented a new enterprise resource planning system which resulted in a material change to our internal control over financial reporting. We continue to review the impact of the implementation and make changes to the internal control over financial reporting to address the inherent risks associated with implementing the new system. The implementation of the system is expected to strengthen our overall internal controls. Other than the enterprise resource planning system implementation, there were no changes in our internal control over financial reporting during the period covered by this reportsecond quarter of 2017 that hashave materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.
KNOLL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For the six months ended June 30, 2016,2017, there have been no new material legal proceedings or material changes in the legal proceedings disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015.2016.
ITEM 1A. RISK FACTORS
For the six months ended June 30, 2016,2017, there have been no material changes in the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015.2016.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND THE USE OF PROCEEDS
Repurchases of Equity Securities
The following is a summary of share repurchase activity during the threesix months ended June 30, 2016.2017.
On August 17, 2005, our board of directors approved a stock repurchase program (the “Options Proceeds Program”), whereby they authorized us to purchase shares of our common stock in the open market using the cash proceeds received by us upon exercise of outstanding options.
On February 2, 2006, our board of directors approved an additional stock repurchase program, pursuant to which we are authorized to purchase up to $50.0 million of our common stock in the open market, through privately negotiated transactions, or otherwise. On February 4, 2008, our board of directors expanded this previously authorized $50.0 million stock repurchase program by an additional $50.0 million.
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Period | Total Number of Shares Purchased | | | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs (1) |
April 1, 2016 - April 30, 2016 | 23,550 |
| | (2) | | $ | 22.95 |
| | 16,023 |
| (3) | $ | 32,352,413 |
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May 1, 2016 - May 31, 2016 | 26,792 |
| |
| | $ | 26.49 |
| | 26,792 |
| (3) | $ | 32,352,413 |
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June 1, 2016 - June 30, 2016 | 33,566 |
| |
| | $ | 25.07 |
| | 33,566 |
| (3) | $ | 32,352,413 |
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Total | 83,908 |
| | | | |
| | 76,381 |
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Period | Total Number of Shares Purchased | | | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs (1) |
April 1, 2017 - April 31, 2017 | 9,455 |
| | (2) | | $ | 23.51 |
| | — |
| | $ | 32,352,413 |
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May 1, 2017 - May 31, 2017 | — |
| |
| | $ | — |
| | — |
| | $ | 32,352,413 |
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June 1, 2017 - June 30, 2017 | — |
| |
| | $ | — |
| | — |
| | $ | 32,352,413 |
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Total | 9,455 |
| | | | |
| | — |
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(1) There is no limit on the number or value of shares that may be purchased by us under the Options Proceeds Program. Under our $50.0 million stock repurchase program, which was expanded by an additional $50.0 million in February 2008, we are only authorized to spend an aggregate of $100.0 million on stock repurchases. Amounts in this column represent the amounts that remain available under the $100.0 million stock repurchase program as of the end of the period indicated. There is no scheduled expiration date for the Option Proceeds Program or the $100.0 million stock repurchase program, but our Board of Directors may terminate either program in the future.
(2) In April 2016, 18,0802017, 15,451 shares of outstanding restricted stock and 5,000 restricted stock units vested. Concurrently with the vesting, 7,5279,455 shares were forfeited by the holders of the restricted shares to cover applicable taxes paid on the holders' behalf by the Company.
(3) These shares were purchased under the Options Proceeds Program.
ITEM 6. EXHIBITS
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Exhibit Number | | Description |
| | |
10.1 | | Amended and Restated Employment Agreement, dated as of July 1, 2016, between Knoll, Inc. and Andrew B. Cogan |
10.2 | | Summary of Craig B. Spray 2016 Compensation |
10.3 | | Summary of Joseph T. Coppola 2016 Compensation |
10.4 | | Summary of Benjamin A. Pardo 2016 Compensation |
31.1 | | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. |
31.2 | | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. |
32.1 | | Certification of Chief Executive Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32.2 | | Certification of Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101*101 | | The following materials from the Company's Quarterly Report on Form 10-Q for the period ended June 30, 20162017 formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of June 30, 20162017 and December 31, 2015,2016, (ii) Condensed Consolidated Statements of Operations and Other Comprehensive Income for the three and six months ended June 30, 20162017 and 2015,2016, (iii) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 20162017 and 2015,2016, and (iv) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.* |
* The Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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KNOLL, INC. | | |
(Registrant) | | |
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Date: | August 9, 20162017 |
| | By: | /s/ Andrew B. Cogan |
| | | Andrew B. Cogan |
| | | Chief Executive Officer |
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Date: | August 9, 20162017 |
| | By: | /s/ Craig B. SprayCharles W. Rayfield |
| | | Craig B. SprayCharles W. Rayfield |
| | | Chief FinancialAccounting Officer |
| | | (Chief AccountingPrincipal Financial Officer) |