Knoll, Inc. (KNL), a leading designer and manufacturer of furnishings, textiles and fine leathers for the workplace and home, today announced results for the third quarter ended September 30, 2017. Net sales were $291.3 million for the third quarter of 2017, a decrease of 0.3%, from the third quarter of 2016. Operating profit was $30.1 million for the third quarter of 2017, a decrease of 14.4%, from the third quarter of 2016. Net income for the third quarter of 2017 was $19.1 million, a decrease of 11.5%, when compared to the third quarter of 2016. Diluted earnings per share was $0.39 and $0.44 for the third quarter of 2017 and 2016, respectively.
"The third quarter was an important inflection point as sales stabilized and we returned to double digit levels of profitability," commented Andrew Cogan, Knoll President and CEO. "For the first time, sales of our newer workplace models and related products exceeded those of our legacy systems. Coupled with continued growth in our residential and Specialty businesses, the initiatives we have taken over the past year to increase our market penetration and Office sales, position us well for a return to growth."
Third Quarter Results
Third quarter 2017 financial results highlights are as follows:
Net sales were $291.3 million for the third quarter of 2017, a decrease of 0.3%, from the third quarter of 2016. Net sales for the Office segment were $181.2 million during the third quarter of 2017, a decrease of 2.5%, when compared to the third quarter of 2016. The decrease in Office sales compared to the third quarter of 2016 was due primarily to a decline in government sales, while Office commercial sales were flat. Net sales for the Studio segment were $83.2 million during the third quarter of 2017, an increase of 4.2%, when compared to the third quarter of 2016. Increased sales at Holly Hunt and the incremental sales from DatesWeiser were partially offset by a decrease in contract shipments at KnollStudio. Net sales for the Coverings segment were $26.9 million during the third quarter of 2017, an increase of 1.5%, when compared to the third quarter of 2016. The increase in Coverings was driven primarily by higher volume in the Spinneybeck | FilzFelt and Edelman businesses, partially offset by volume declines in KnollTextiles.
Gross profit for the third quarter of 2017 was $106.6 million, a decrease of $6.2 million, or 5.5%, when compared to the third quarter of 2016. Gross margin decreased from 38.6% in the third quarter of 2016 to 36.6% in the third quarter of 2017. This decrease was driven primarily by accelerated commodity inflation, foreign exchange headwinds, and unfavorable mix related to the ramp up of newer product platforms. These declines were partially offset by continuous improvement and lean initiatives.
Total operating expenses were $76.5 million for the third quarter of 2017, or 26.3% of net sales, compared to $77.6 million, or 26.6% of net sales, for the third quarter of 2016. The decrease was due primarily to lower incentive compensation from decreased profitability.
The tax rate for the third quarter of 2017 was 29.9%, down from 34.9% in the third quarter of 2016. The decrease in the tax rate was related primarily to the reversal of a valuation allowance against certain foreign jurisdiction deferred tax assets. 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.
Capital expenditures for the third quarter of 2017 totaled $8.7 million compared to $10.4 million in the third quarter of 2016. During the third quarter of 2017, the Company paid a quarterly dividend of $7.3 million, or $0.15 per share, compared to a quarterly dividend of $7.2 million, or $0.15 per share, in the third quarter of 2016.
Business Segment Results
The Company manages its business through its reportable 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 our 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 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.
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.
In 2016, the Company revised its segment presentation to segregate Corporate costs. The Company believes 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. Management regularly reviews the costs included in the Corporate function, and believes disclosing such information provides more visibility and transparency of how the chief operating decision maker reviews the results for the Company.
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: