Knoll, Inc. Friday announced results for the fourth quarter ended December 31, 2016. Net sales were $292.9 million for the fourth quarter, a decrease of 4.2%, from the fourth quarter of 2015. Operating profit for the quarter increased 63.8%, to $35.8 million, compared to operating profit of $21.8 million for the fourth quarter of 2015. Adjusted operating profit was $35.8 million, an increase of 5.6% when compared to adjusted operating profit of $33.9 million in the fourth quarter of 2015. Net earnings for the fourth quarter of 2016 were $21.4 million, an increase of 59.4% when compared to the fourth quarter of 2015. Diluted earnings per share was $0.44 and $0.28 for the fourth quarter of 2016 and 2015, respectively. Adjusted diluted earnings per share was $0.44 and $0.43 for the fourth quarter of 2016 and 2015, respectively.

Net sales were $1,164.3 million for the year ended December 31, 2016, an increase of 5.4% from 2015. Operating profit for the year increased 34.8% to $136.3 million, compared to operating profit of $101.1 million for the year ended December 31, 2015. Adjusted operating profit was $136.3 million, an increase of 20.0% when compared to adjusted operating profit of $113.5 million in 2015. Net earnings for 2016 were $82.1 million, an increase of 24.4% when compared to 2015. Diluted earnings per share was $1.68 and $1.36 for the year ended December 31, 2016 and 2015, respectively. Adjusted diluted earnings per share was $1.68 and $1.52 for the year ended December 31, 2016 and 2015, respectively.

"2016 was a good year for Knoll as our expanding constellation of high-design and high-margin brands and capabilities yielded strong results," commented Andrew Cogan, President and CEO. "We set an all-time record for sales, grew sales faster than the market, expanded our industry leading operating margins as committed by over 100 basis points and laid the foundation for longer term growth with investments in new capabilities in ancillary categories with Rockwell Unscripted and the fourth quarter acquisition of the conference and meeting furniture company DatesWeiser. While we were impacted in the fourth quarter by the slowdown in demand that has been sweeping across the industry, we see reasons to be hopeful that with the uncertainty of the presidential election behind us, demand should improve later in the year."

Fourth Quarter Results

Fourth quarter 2016 financial results highlights are as follows:

Net sales were $292.9 million for the fourth quarter of 2016, a decrease of 4.2%, from the fourth quarter of 2015. Net sales for the Office segment were $180.9 million during the fourth quarter of 2016, a decrease of 8.4%. The decrease in the Office segment was due primarily to a decline in demand in certain geographies and vertical markets. Nationally, office space absorption declined precipitously in the fourth quarter and we believe that impacted the overall industry as well. Net sales for the Studio segment were $83.4 million during the fourth quarter of 2016, an increase of 3.3%. The increase in the Studio segment was led by KnollStudio in North America, offset partially by a decline in Europe due to the timing of a couple large projects in in the fourth quarter of 2015. Net sales for the Coverings segment were $28.5 million during the fourth quarter of 2016, an increase of 4.1%.

Gross profit for the fourth quarter of 2016 was $111.3 million, a decrease of $3.1 million, or 2.7%, when compared with the fourth quarter of 2015. Gross profit for the fourth quarter of 2015 includes a one-time charge of $0.9 million due to the discontinuation of one of our seating products. Adjusted gross profit for the fourth quarter of 2016 was $111.3 million, a decrease of $4.0 million, or 3.5%, when compared with the fourth quarter of 2015. During the fourth quarter of 2016, adjusted gross margin increased to 38.0% from 37.7% in the fourth quarter of 2015. The increase was related primarily to favorable net price realization and operational efficiencies partially offset by reduced fixed-cost leverage benefits resulting from lower sales volume in the Office segment.

Operating expenses were $75.6 million for the fourth quarter of 2016, or 25.8% of net sales, compared to $92.6 million, or 30.3% of net sales, for the fourth quarter of 2015. Operating expenses in the fourth quarter of 2015 included a non-cash Edelman tradename impairment of $10.7 million, as well as restructuring charges of $0.5 million. Adjusted operating expenses were $75.6 million for the fourth quarter of 2016, compared to $81.5 million for the fourth quarter of 2015. The decrease in adjusted operating expenses was related primarily to lower commissions and incentive accruals resulting from decreased sales volume.

Operating profit for the fourth quarter of 2016 increased 63.8%, to $35.8 million, compared to operating profit of $21.8 million for the fourth quarter of 2015. Adjusted operating profit for the fourth quarter of 2016 increased 5.6%, to $35.8 million, compared to adjusted operating profit of $33.9 million for the fourth quarter of 2015. Operating profit for the Office segment for the fourth quarter of 2016 was $17.9 million, or 9.9% of net sales, a decrease of $1.9 million, or 9.8% from the fourth quarter of 2015. Adjusted operating profit for the Office segment for the fourth quarter of 2016 was $17.9 million, or 9.9% of net sales, a decrease of $3.3 million, or 16.0% from the fourth quarter of 2015. Operating profit for the Studio segment for the fourth quarter of 2016 was $13.9 million, or 16.7% of net sales, an increase of $1.6 million, or 13.3% from the fourth quarter of 2015. Adjusted operating profit for the Studio segment for the fourth quarter of 2016 was $13.9 million, or 16.7% of net sales, an increase of $1.6 million, or 13.3% from the fourth quarter of 2015. Operating profit for the Coverings segment for the fourth quarter of 2016 was $6.5 million, or 22.7% of net sales, an increase of $10.6 million, or 258.9% from the fourth quarter of 2015. Adjusted operating profit for the Coverings segment for the fourth quarter of 2016 was $6.5 million, or 22.7% of net sales, a decrease of $0.1 million, or 1.5% from the fourth quarter of 2015.

During the fourth quarter of 2016, other income was $0.1 million compared to $0.5 million for the fourth quarter of 2015. Other income was related to the impact of exchange rate fluctuations on our foreign subsidiaries for both the fourth quarter of 2016 and 2015.

Net income for the fourth quarter of 2016 was $21.4 million, or $0.44 diluted earnings per share, compared to $13.4 million, or $0.28 diluted earnings per share, for the fourth quarter of 2015. Adjusted diluted earnings per share was $0.44 and $0.43 for the fourth quarter of 2016 and 2015, respectively.

The tax rate for the fourth quarter of 2016 was 38.1% compared to 35.5% for the fourth quarter of 2015. The increase in the effective tax rate is due partly to the effect of a catch up of certain tax credits in the prior year as well as the mix of pretax income and the varying effective tax rates in the countries and states in which we operate.

During the fourth quarter of 2016, cash provided by operations was $8.6 million compared to $50.7 million for the fourth quarter of 2015. The main driver of cash provided by operations was a $43.0 million discretionary payment to fund the Company`s pension plans. This funding is expected to reduce pension expenses and minimize the Company`s exposure to the increasing Pension Benefit Guaranty Corporation variable rate insurance premiums in 2017. Capital expenditures for the fourth quarter of 2016 totaled $14.7 million compared to $10.1 million in the fourth quarter of 2015. The Company paid a quarterly dividend of $7.3 million and $7.2 million, or $0.15 per share, during the fourth quarter of 2016 and 2015, respectively.

Full Year Results

Full year 2016 financial results highlights are as follows:

Net sales were $1,164.3 million for the year ended 2016, an increase of 5.4% from 2015. Net sales for the Office segment were $731.3 million in 2016, an increase of 6.5% from 2015. The increase in the Office segment was led by continued growth in our core systems portfolio, as well as increases in our complementary products. Net sales for the Studio segment were $323.4 million in 2016, an increase of 6.5%. The increase in the Studio segment was led by KnollStudio in North America and Europe. Net sales for the Coverings segment were $109.5 million in 2016, a decrease of 3.6%. Continued year-over-year growth in Spinneybeck | FilzFelt sales was offset by lower volume at KnollTextiles and Edelman.

Gross profit for 2016 was $446.0 million, an increase of $33.9 million, or 8.2%, when compared with 2015. Gross profit for 2015 includes a one-time charge of $0.9 million due to the discontinuation of one of our seating products. Adjusted gross profit for 2016 was $446.0 million, an increase of $33.0 million, or 8.0%, when compared with 2015. During 2016, adjusted gross margin improved to 38.3% from 37.4% in 2015. This improvement was driven mainly by the Office and Studio segments, where operating efficiencies and improved fixed-cost leverage from higher volumes were favorable.

Operating expenses were $309.7 million in 2016, or 26.6% of net sales, compared to $311.1 million, or 28.2% of net sales in 2015. Operating expenses for 2015 include a non-cash Edelman tradename impairment of $10.7 million, as well as restructuring charges of $0.9 million. Excluding these items, adjusted operating expenses were $309.7 million for 2016, compared to $299.5 million for 2015. The increase in adjusted operating expenses was primarily related to expanded sales, marketing and product development investments as well as additional headcount.

Operating profit for 2016 increased 34.8%, to $136.3 million, compared to operating profit of $101.1 million for 2015. Adjusted operating profit for 2016 increased 20.0%, to $136.3 million, compared to adjusted operating profit of $113.5 million for 2015. Operating profit for the Office segment was $73.9 million in 2016, or 10.1% of net sales, an increase of $18.1 million, or 32.3% from 2015. Adjusted operating profit for the Office segment was $73.9 million in 2016, or 10.1% of net sales, an increase of $16.7 million, or 29.2% from 2015. Operating profit for the Studio segment was $53.4 million in 2016, or 16.5% of net sales, an increase of $5.5 million, or 11.4% from 2015. Adjusted operating profit for the Studio segment was $53.4 million in 2016, or 16.5% of net sales, an increase of $5.1 million, or 10.5% from 2015. Operating profit for the Coverings segment was $26.0 million in 2016, or 23.7% of net sales, an increase of $8.7 million, or 50.3% from 2015. Adjusted operating profit for the Coverings segment was $26.0 million in 2016, or 23.7% of net sales, a decrease of $2.0 million, or 7.1% from 2015.

During 2016, other expense was $3.4 million compared to other income of $9.2 million in 2015. Other expense in 2016 was related primarily to foreign exchange losses that resulted from the revaluation of intercompany balances between our Canadian and US entities. Other income in 2015 was due primarily to the settlement of an outstanding receivable at our Canadian subsidiary.

Net income for 2016 was $82.1 million, or $1.68 diluted earnings per share, compared to $66.0 million, or $1.36 diluted earnings per share for 2015. Adjusted diluted earnings per share was $1.68 and $1.52 for 2016 and 2015, respectively.

The tax rate for 2016 was 35.6% compared to 36.2% for 2015. The mix of pretax income and the varying effective tax rates in the countries and states in which we operate directly affects our consolidated effective tax rate.

During 2016, cash provided by operations was $104.3 million compared to $88.9 million in 2015. In 2016, cash provided by operations included $53.0 million of discretionary payments to fund the Company`s pension plans. Again, this funding is expected to reduce pension expenses and minimize the Company`s exposure to the increasing Pension Benefit Guaranty Corporation variable rate insurance premiums in 2017. Capital expenditures for 2016 totaled $40.1 million compared to $29.6 million in 2015. During 2016, the Company paid dividends of $29.2 million, or $0.60 per share, compared to dividends of $24.4 million, or $0.51 per share in 2015.

"Ongoing cash management initiatives have allowed us to support recent acquisitions, fund our pension plans and continue to investment in the business, all while reducing our debt leverage from 1.67 times EBITDA at year end 2015 to 1.37 at year end 2016," noted Craig B. Spray, SVP & CFO.

Business Segment Results

The Company 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 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 determined it appropriate to revise 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.