EAST GREENVILLE, PA - Knoll, Inc. (NYSE: KNL) today announced results for the second quarter ended June 30, 2014. Net sales were $265.8 million for the quarter, an increase of 24.0% from second quarter of 2013. Organically, excluding the impact of HOLLY HUNT®, which we acquired on February 3, 2014, sales increased 11.4% when compared with the second quarter of 2013. Operating profit for the quarter was $22.2 million, which includes restructuring charges of $0.2 million. Operating profit increased 79.0% for the quarter when compared to operating profit of $12.4 million in the second quarter of 2013. Adjusted operating profit for the second quarter of 2014 was $22.4 million, or an 80.6% increase over the second quarter of 2013. Net income for the second quarter of 2014 was $10.8 million, an increase of 36.7% when compared with the second quarter of 2013. Diluted earnings per share was $0.23 for the quarter compared to $0.17 per share in the prior year. During the second quarter of 2014, non-cash charges relating to foreign exchange losses decreased earnings $0.03 per share.

"Across the board, each of our segments delivered improved sales and operating profits," commented Andrew Cogan, CEO. "We believe that the results we reported this quarter demonstrate the impact our strategic efforts to broaden our exposure to high margin, high design Specialty and consumer facing businesses can have on our top and bottom line results, particularly when coupled with improving performance in our core Office segment," he added.

Second Quarter Results

Second quarter 2014 financial results highlights are as follows:

Dollars in Millions, Except Per Share Data Three Months Ended Percent
6/30/2014 6/30/2013 Change
Net Sales $ 265.8 $ 214.3 24.0 %
Gross Profit 97.2 69.9 39.1 %
Gross Profit % 36.6 % 32.6 % 12.3 %
Operating Expenses 74.8 57.5 30.1 %
Restructuring Charges 0.2 - N/A
Operating Profit 22.2 12.4 79.0 %
Operating Profit % 8.4 % 5.8 % 44.8 %
Adjusted Operating Profit 22.4 12.4 80.6 %
Adjusted Operating Profit % 8.4 % 5.8 % 44.8 %
Net Income 10.8 7.9 36.7 %
Earnings Per Share - Diluted 0.23 0.17 35.3 %

Adjusted operating profit and organic net sales growth are non-GAAP financial measures.  Adjusted operating profit is calculated by excluding items from operating profit that we believe are infrequent or not indicative of our operating performance.  Organic sales growth represents the change in net sales excluding the impact of HOLLY HUNT®, which we acquired on February 3, 2014.  For a reconciliation of adjusted operating profit and organic net sales growth to operating profit, and net sales respectively, see "Reconciliation of Non-GAAP Financial Measures" below.

Net sales for the Office segment were $159.1 million during the second quarter of 2014, an increase of $11.0 million, or 7.4%, when compared with the second quarter of 2013.  Increased sales in the Office segment were the result of improved government and commercial sales year-over-year; this quarter marked the first increase in governmental sales since 2011.  Net sales for the Studio segment were $76.3 million, an increase of $39.1 million, or 105.1%, when compared with the second quarter of 2013.  The increase in sales in the Studio segment was attributable to the acquisition of HOLLY HUNT® during the first quarter of 2014 as well as organic growth in Europe and North America.  Excluding HOLLY HUNT®, organic sales increased in the Studio segment during the second quarter of 2014 by $12.0 million, or 32.3%.  Net sales for the Coverings segment were $30.4 million, an increase of $1.4 million, or 4.8%, when compared with the second quarter of 2013. 

Gross profit for the second quarter of 2014 was $97.2 million, an increase of $27.3 million, or 39.1%, when compared with the same period in 2013.  During the second quarter 2014, gross margin (gross profit as a percentage of net sales) increased to 36.6% from 32.6% in the same quarter of 2013. The increase in gross margin from the second quarter of 2013 mainly resulted from the mix of higher margin HOLLY HUNT sales as well as better absorption and improved costs in our Office segment. 

Operating expenses, excluding $0.2 million of restructuring charges, were $74.8 million, or 28.1% of net sales, compared to $57.5 million, or 26.8% of net sales, for the second quarter of 2013.  The increase in operating expenses during the second quarter of 2014 was in large part due to the addition of the operating expenses from HOLLY HUNT®and greater commission and incentive compensation expenses incurred as a result of higher sales and profits.

Operating profit for the second quarter of 2014 was $22.2 million, an increase of $9.8 million, or 79.0%, when compared to the same period in 2013. Operating profit for the second quarter of 2014 includes restructuring related expenses of $0.2 million.  Excluding the restructuring expenses, adjusted operating profit would have been $22.4 million, or 8.4% of net sales, during the second quarter of 2014.  For a reconciliation of adjusted operating profit to GAAP operating profit, see "Reconciliation of Non-GAAP Financial Measures" below.  Operating profit for the Office segment was $6.4 million in the second quarter of 2014, an increase of $3.0 million, or 88.2% when compared with the second quarter of 2013.  The increase in operating profit in the Office Segment was attributable to increased sales, improved pricing, better absorption of our fixed costs, and benefits from our supply chain transformation efforts.  Operating profit for the Studio segment was $9.5 million, an increase of $6.2 million, or 187.9% when compared with the second quarter of 2013.  The increase in operating profit in the Studio segment during the second quarter of 2014 was the result of the acquisition of HOLLY HUNT® and improved performance year-over-year for KnollStudio in North America and Europe.  Operating profit for the Coverings segment was $6.3 million, an increase of $0.6 million, or 10.5% when compared to the second quarter of 2013. 

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

The mix of pretax income and the varying effective tax rates in the countries in which we operate directly affects our consolidated effective tax rate. The effective tax rate was 38.2% for the quarter, as compared to 39.8% for the same period last year.

Net income for the second quarter 2014 was $10.8 million, or $0.23 diluted earnings per share, as compared to $7.9 million, or $0.17 per share, for the same quarter in 2013. 

During the second quarter of 2014 and 2013, cash provided by operations was $18.6 million and $20.1 million, respectively.  Capital expenditures for the period totaled $9.9 million compared to $10.5 million in the comparable period for 2013.  During the second quarter of 2014, the Company paid a quarterly dividend of $5.7 million, or $0.12 per share, compared to a quarterly dividend of $5.6 million, or $0.12 per share, in the second quarter of 2013. 

"Maintaining a strong and flexible balance sheet remains a top priority for us.  The new credit facility that we entered into this quarter provides flexibility and, at the same time, reduces our borrowing costs. Just one full quarter post the HOLLY HUNT acquisition, with improving EBITDA and continued debt pay down, our bank leverage ratio is already back below 3:1," commented Craig B. Spray, SVP & CFO.

Business Segment Results

The following information categorizes the Company's results into its defined reporting segments.

The Office segment serves corporate, government, healthcare, retail and other customers in the United States and Canada providing a portfolio of office furnishing solutions including office systems, seating, storage, tables, desks and KnollExtra® ergonomic accessories. The Office segment also includes international sales of our North American office products. The Studio segment includes KnollStudio®, Knoll Europe which sells primarily KnollStudio products, Richard Schultz®Design, and HOLLY HUNT®. The Coverings segment includes, KnollTextiles®, Spinneybeck®, Edelman®Leather, and Filzfelt(TM). These businesses serve a wide range of customers offering high quality textiles and leather.

Three Months Ended
June 30,
Net Sales (in millions) 2014 2013
Office $ 159.1 $ 148.1
Studio 76.3 37.2
Coverings 30.4 29.0
Total Net Sales $ 265.8 $ 214.3



Three Months Ended June 30,
Operating Profit (in millions) 2014 2013
Office $ 6.4 $ 3.4
Studio 9.5 3.3
Coverings 6.3 5.7
Total Operating Profit $ 22.2 $ 12.4

 Reconciliation of Non-GAAP Financial Measures

This release contains adjusted operating profit, adjusted EBITDA, and organic sales growth (decline) measures, which are non-GAAP financial measures.  These non-GAAP measures are calculated by excluding items that we believe to be infrequent or not indicative of our operating performance.  For the periods covered by this release such items consist of restructuring charges.  Organic sales growth (decline) represents the change in sales excluding the impact of HOLLY HUNT®.  We present these non-GAAP measures because we consider them to be important supplemental measures of our performance and believe them to be useful to show ongoing results from operations distinct from items that are infrequent or not indicative of our operating performance.

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 expenses similar to the 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 supplementally.

The following tables reconcile adjusted operating profit to GAAP operating profit for the periods indicated.

Three Months Ended
June 30,
2014 2013
Operating Profit ($mm) $ 22.2 $ 12.4
Add back:
Restructuring charges 0.2 -
Adjusted Operating Profit $ 22.4 $ 12.4
Net Sales $ 265.8 $ 214.3
Operating Profit % 8.4 % 5.8 %
Adjusted Operating Profit % 8.4 % 5.8 %

The following tables reconcile net sales to organic net sales for the periods indicated.

Three Months Ended
June 30, 2014
Three Months Ended
 June 30, 2013
Net Sales Holly Hunt Organic Net Sales
Office $ 159.1 $ - $ 159.1 $ 148.1
Studio 76.3 27.1 49.2 37.2
Coverings 30.4 - 30.4 29.0
Total $ 265.8 $ 27.1 $ 238.7 $ 214.3
Percent change over prior year 24.0 % 11.4 %

The following tables illustrates the computation of our bank leverage calculation is in accordance with our Second Amended and Restated Credit Agreement dated May 20, 2014.

6/30/2013 9/30/2013 12/31/2013 3/31/2014 6/30/2014
Debt Levels (1) $ 194.0 $ 188.8 $ 178.8 $ 289.8 $ 287.8
LTM Net Income ($mm) 43.7 40.0 23.1 25.3 28.2
LTM Adjustments
Interest 5.6 5.4 5.3 5.5 5.9
Taxes 25.7 23.6 15.4 15.8 17.4
Depreciation and Amortization 16.6 16.4 16.3 16.9 17.8
Non-cash items (2) 8.2 7.6 20.4 27.1 28.8
LTM Adjusted EBITDA $ 99.8 $ 93.0 $ 80.5 $ 90.6 (4) $ 98.1 (4)
Bank Leverage Calculation (3) 1.94 2.03 2.22 3.20 2.93
(1) - Outstanding debt levels include outstanding letters of credit and guarantee obligations.  Excess cash over $15.0 million reduces outstanding debt per the terms of our credit facility, a copy of which was filed with the Securities and Exchange Commission on May 21, 2014.
(2) - Non-cash items include, but are not limited to, stock-based compensation expenses, unrealized gains and losses on foreign exchange, an intangible asset impairment charge, and restructuring charges.
(3) - Debt divided by LTM Adjusted EBITDA, as calculated in accordance with our credit facility.

(4) - Includes an annualized proforma EBITDA for HOLLY HUNT, which was acquired on February 3, 2014.

 

Source: Knoll Inc.

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