Knoll, Inc. today announced results for the third quarter ended September 30, 2018. Net sales were $327.7 million for the third quarter of 2018, an increase of 12.5% from the third quarter of 2017. Operating profit was $32.9 million, an increase of 18.7% from the third quarter of 2017. Adjusted operating profit for the third quarter of 2018 was $36.9 million, an increase of 30.0% from the third quarter of 2017. Net earnings for the third quarter of 2018 were $20.3 million, an increase of 6.2% compared to the third quarter of 2017. Adjusted net earnings for the third quarter of 2018 were $23.7 million, an increase of 21.1% compared to the third quarter of 2017. Adjusted EBITDA was $47.2 million, an increase of 21.0% compared to $39.0 million in the third quarter of 2017. Diluted earnings per share was $0.41 and $0.39 for the third quarter of 2018 and 2017, respectively. Adjusted diluted earnings per share was $0.48 and $0.40 for the third quarter of 2018 and 2017, respectively.

“The bold actions we’ve taken, from the acquisition of Muuto to the launch of new platforms like Rockwell Unscripted and the reorganization and expansion of our selling capacity, have continued to enable us to respond to changing design trends and allocation of space within the workplace, penetrate faster growing ancillary categories and drive top line growth. Coupled with initiatives to increase the share of revenue from our high-design, high-margin global Lifestyle businesses which now represent 40% of our revenues, we are building a unique constellation of design driven brands with durable competitive advantages and superior profitability,” commented Andrew Cogan, Knoll’s Chairman and CEO.

“This quarter the benefit of these initiatives combined with favorable price realization and efforts by our supply chain team to offset continued inflationary pressures led to 100 basis points of Adjusted EBITDA margin expansion and Adjusted EPS growth of 20%. Looking ahead to the end of the year we expect to continue to grow our business, expand our margins and further delever our balance sheet,” added Cogan.

Third Quarter Results

Third quarter 2018 financial results highlights are as follows:

(1) See Reconciliation of Non-GAAP Financial Measures below.

Net sales were $327.7 million for the third quarter of 2018, an increase of 12.5%, from the third quarter of 2017. Net sales for the Office segment were $197.6 million during the third quarter of 2018, an increase of $5.4 million, or 2.8% compared to the third quarter of 2017. Newer workplace platforms and ancillary products drove sales growth while legacy system sales remained flat. Net sales for the Lifestyle segment were $130.1 million during the third quarter of 2018, an increase of 31.4% compared with the third quarter of 2017. This increase was primarily driven by the inclusion of three months of sales from Muuto as well as increased volume in our contract markets across all Lifestyle businesses. Organic net sales for the Lifestyle segment grew 8.7% in the third quarter of 2018 compared to the same quarter in 2017.

Gross profit for the third quarter of 2018 was $122.8 million, an increase of $16.2 million, or 15.2% compared to the third quarter of 2017. During the third quarter of 2018, gross margin increased to 37.5% from 36.6% in the third quarter of 2017. The increase in gross margin was primarily the result of the continued shift of the percentage of total Knoll, Inc. sales towards our higher margin Lifestyle segment, which experienced significantly higher sales growth than our Office segment.

Operating expenses were $89.9 million for the third quarter of 2018, or 27.4% of net sales, compared to $78.9 million, or 27.1% of net sales, for the third quarter of 2017. Operating expenses in the third quarter of 2018 included acquisition related expenses of $2.8 million. Acquisition related expenses included amortization of acquired intangible assets of $2.1 million, retention agreements for key employees of $0.9 million, and other customary acquisition related expenses of $0.2 million, partially offset by the reduction of an acquisition related liability of $0.4 million. Operating expenses also included restructuring charges of $1.2 million which were related to the Company's supply chain optimization initiative. Excluding these items, adjusted operating expenses were $85.9 million for the third quarter of 2018, or 26.2% of net sales compared to $78.3 million, or 26.9% of net sales in the third quarter of 2017. The increase in adjusted operating expenses was related primarily to incremental operating expenses from Muuto, in addition to increased warehousing and showroom costs.

During the third quarter of 2018, interest expense was $5.0 million, an increase of $3.0 million compared to the third quarter of 2017. This increase was due primarily to additional debt from the Muuto acquisition and higher interest rates.

During the third quarter of 2018, other expense was $0.4 million compared to other income of $1.6 million for the third quarter of 2017. Other expense during the third quarter of 2018 was primarily related to foreign exchange losses, partially offset by net periodic benefit income from the Company's pension and other post-employment benefit plans. Other expense for the third quarter of 2018 also included a pension settlement charge of $0.6 million related to the cash payments from lump sum elections.

Net earnings for the third quarter of 2018 was $20.3 million, or $0.41 diluted earnings per share, compared to $19.1 million, or $0.39 diluted earnings per share, for the third quarter of 2017. Excluding the impact of the acquisition related expenses, restructuring charges and the pension settlement charge, adjusted net earnings for the third quarter of 2018 was $23.7 million, or $0.48 adjusted diluted earnings per share, compared to $19.6 million, or $0.40 adjusted diluted earnings per share for the third quarter of 2017.

The effective tax rate for the third quarter of 2018 was 26.1%, down from 29.9% in the third quarter of 2017. The effective tax rate for the third quarter of 2017 was favorably impacted by the reversal of a valuation allowance against certain foreign jurisdiction deferred tax assets. Excluding the impact of the valuation allowance reversal, the effective tax rate for the third quarter of 2018 decreased significantly from the third quarter of 2017 primarily due to the passage of the U.S. Tax Cuts and Jobs Act (“Tax Reform”) in the fourth quarter of 2017. The Company expects its full year effective tax rate will be between 25% and 26% for fiscal year 2018. 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.

Capital expenditures for the third quarter of 2018 totaled $5.3 million compared to $8.7 million in the third quarter of 2017. During the third quarters of 2018 and 2017, the Company paid a quarterly dividend of $7.3 million, or $0.15 per share.

Business Segment Results

The Company manages its business through its reportable segments: Office and Lifestyle. All unallocated expenses are included within Corporate.

The Office segment includes a complete range of workplace products that address diverse workplace planning paradigms in North America and Europe. These products include: systems furniture, seating, storage, tables, desks and KnollExtra® accessories as well as the international sales of our Office products.

The Lifestyle segment includes KnollStudio®, HOLLY HUNT®, DatesWeiser, Muuto, KnollTextiles®, Spinneybeck® (including Filzfelt®), and Edelman® Leather. KnollStudio products, which are distributed in North America and Europe, 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 addition, HOLLY HUNT® also includes Vladimir Kagan Design Group, a renowned collection of modern luxury furnishings. DatesWeiser, known for its sophisticated meeting and conference tables and credenzas, sets a standard for design, quality and technology integration. The KnollTextiles®, Spinneybeck® (including Filzfelt®), and Edelman® Leather businesses provide a wide range of customers with high-quality fabrics, felt, leather and related architectural products. The acquisition of Muuto rounds out the Lifestyle segment with its ancillary products and affordable luxury furnishings to make the Lifestyle segment an all-encompassing “resimercial”, high-performance workplace, from uber-luxury living spaces to affordable luxury residential living.

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.