Knoll, Inc. (KNL), a leading designer and manufacturer of furnishings, textiles and fine leathers for the workplace and home, today announced results for the first quarter ended March 31, 2018. Net sales were $296.6 million for the quarter, an increase of 15.5%, from the first quarter of 2017. Operating profit for the quarter was $22.5 million, an increase of 8.8%, compared to operating profit of $20.6 million for the first quarter of 2017. Adjusted operating profit was $24.0 million, an increase of 16.3% when compared to adjusted operating profit of $20.6 million in the first quarter of 2017. Net earnings for the quarter were $15.3 million, a decrease of 0.9% when compared to the first quarter of 2017. Adjusted net earnings for the quarter were $17.4 million, an increase of 13.2% when compared to the first quarter of 2017. Adjusted EBITDA was $36.8 million, an increase of 14.1% when compared to $32.3 million in the first quarter of 2017. Diluted earnings per share was $0.31 and $0.31 for the first quarter of 2018 and 2017, respectively. Diluted earnings per share was negatively impacted by a loss on extinguishment of debt, acquisition expenses and restructuring charges in the first quarter of 2018. Adjusted diluted earnings per share was $0.35 and $0.31 for the first quarter of 2018 and 2017, respectively.
“We are very pleased with our strong start to 2018,” commented Knoll President and CEO Andrew Cogan. “Our efforts to diversify our sources of revenue, expand our selling capacity, respond to the changing design trends and allocation of space within the workplace as well as improve our margins are beginning to come together. Furthermore, with an increasing mix of revenue and profits coming from the international and high design residentially oriented businesses in our Lifestyle segment we are building a stronger, differentiated and more sustainably profitable enterprise.” Cogan added, “Looking ahead to the balance of the year we would expect these initiatives to continue to drive top line growth and margin expansion.”
First Quarter Results
First quarter 2018 financial results highlights are as follows:
Net sales were $296.6 million for the first quarter of 2018, an increase of 15.5%, from the first quarter of 2017. Net sales for the Office segment were $181.6 million during the first quarter of 2018, an increase of 15.0%, when compared with the first quarter of 2017. The increase in the Office segment was a result of strong growth in commercial sales in both North America and Europe. Newer workplace platforms and complimentary products drove sales growth, while legacy system sales were consistent with the first quarter of 2017. Net sales for the Lifestyle segment were $115.0 million during the first quarter of 2017, an increase of 16.3%, when compared with the first quarter of 2017. This increase was primarily driven by the inclusion of two months of sales from Muuto, which was acquired on January 25, 2018, as well as higher sales at DatesWeiser.
Gross profit for the first quarter of 2018 was $107.7 million, an increase of $12.0 million, or 12.6%, when compared with the first quarter of 2017. During the first quarter of 2018, gross margin decreased to 36.3% from 37.3% in the first quarter of 2017. This decrease was driven mainly by the Office segment, where higher volume and a favorable shift of mix towards new product platforms were offset by unfavorable commodity and transportation inflation when compared to the first quarter of 2017.
Operating expenses were $85.2 million for the first quarter of 2018, or 28.7% of net sales, compared to $75.1 million, or 29.2% of net sales, for the first quarter of 2017. Operating expenses in the first quarter of 2018 included acquisition expenses of $1.0 million related to the Muuto acquisition, and restructuring charges of $0.5 million. The restructuring charges were related to an organizational realignment that will result in greater operational efficiency and control. Excluding these items, adjusted operating expenses were $83.7 million for the first quarter of 2018, or 28.2% of net sales compared to $75.1 million for the first quarter of 2017. The increase in adjusted operating expenses was related primarily to incremental operating expenses from Muuto as well as the expansion of our sales force.
During the first quarter of 2018, interest expense was $5.5 million, compared to $1.7 million in the first quarter of 2017. Interest expense for the first quarter of 2018 included a loss on extinguishment of debt of $1.4 million resulting from the refinancing of the Company's credit facility. Excluding the loss on extinguishment of debt, interest expense for the first quarter of 2018 increased $2.4 million compared to the first quarter of 2017. This increase was due primarily to increased debt levels as a result of the Muuto acquisition and higher interest rates.
During the first quarter of 2018, other income was $4.0 million compared to $2.2 million for the first quarter of 2017. The increase in the first quarter of 2018 was due primarily to favorable foreign exchange gains. Other income is primarily related to foreign exchange gains and net periodic benefit income from the Company's pension and other post-employment benefit plans in both 2018 and 2017. In accordance with the adoption of ASU 2017-07, which was effective for the Company on January 1, 2018, the Company reclassified the net periodic benefit income recognized on the Company's pension and other post-employment benefit plans from selling, general, and administrative expense to other income for all periods presented.
Net earnings for the first quarter of 2018 was $15.3 million, or $0.31 diluted earnings per share, compared to $15.4 million, or $0.31 diluted earnings per share, for the first quarter of 2017. Excluding the impact of acquisition expenses, restructuring charges, and the loss on extinguishment of debt, adjusted net earnings for the first quarter of 2018 was $17.4 million, or $0.35 adjusted diluted earnings per share, compared to $15.4 million, or $0.31 adjusted diluted earnings per share for the first quarter of 2017.
The effective tax rate for the first quarter of 2018 was 27.1%. The effective tax rate for the quarter was favorable compared to the Company's average annual historical effective tax rate as a result of the passage of the U.S. Tax Cuts and Jobs Act (“Tax Reform”) in 2017. Excluding the impact of Tax Reform during 2017, the Company's average annual historical effective tax rate was approximately 37.0% over the past 5 years. The effective tax rate for the first quarter of 2017 was 27.2%, and was impacted by favorable tax treatment related to the vesting of a large quantity of equity awards. 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 first quarter of 2018 totaled $8.5 million compared to $10.7 million in the first quarter of 2017. During the first quarter of 2018, the Company paid a quarterly dividend of $7.4 million, or $0.15 per share, and payment of accrued dividends on vested shares of $0.3 million, compared to payment of a quarterly dividend of $7.3 million, or $0.15 per share, and the payment of accrued dividends on vested shares of $1.1 million during the first quarter of 2017.
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.
In 2018, the Company revised its segment presentation by aggregating the former Studio and Coverings segments with Muuto. Additionally, the Office segment now includes our office business in Europe which was historically reported in Studio. The Company believes this revised presentation better aligns the segments with how management views and operates 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 (in thousands).
