Knoll, Inc. (KNL), a leading designer and manufacturer of furnishings, textiles and fine leathers for the workplace and home, today announced results for the second quarter ended June 30, 2018. Net sales were $323.4 million for the second quarter of 2018, an increase of 20.3%, from the second quarter of 2017. Operating profit was $24.8 million for the second quarter of 2018, an increase of 25.1%, from the second quarter of 2017. Adjusted operating profit for the second quarter of 2018 was $30.6 million, an increase of 35.4%, from the second quarter of 2017. Net income for the second quarter of 2018 was $13.1 million, an increase of 1.5%, when compared to the second quarter of 2017. Adjusted net income for the second quarter of 2018 was $20.8 million, an increase of 41.3%, when compared to the second quarter of 2017. Adjusted EBITDA was $42.1 million, an increase of 30.4% when compared to $32.3 million in the second quarter of 2017. Diluted earnings per share was $0.27 and $0.26 for the second quarter of 2018 and 2017, respectively. Adjusted diluted earnings per share was $0.42 and $0.30 for the second quarter of 2018 and 2017, respectively. Beginning with this second quarter 2018 earnings release, the Company has revised its definition of Adjusted Operating Expense, Adjusted Operating Profit, Adjusted Operating Profit Margin, Adjusted EBITDA, Adjusted Net Earnings and Adjusted Diluted Earnings Per Share, to exclude acquisition related amortization and the corresponding tax benefits.
“The bold actions we’ve taken from the recent acquisition of Muuto, the launch of new platforms like Rockwell Unscripted and the reorganization and expansion of our selling capacity have enabled us to respond to changing design trends and allocation of space within the workplace, penetrate faster growing ancillary categories and accelerate our top line growth. Coupled with initiatives to increase the share of revenue from our high design, high margin global Lifestyle businesses which now represent over 40% of our revenues, we are building a unique constellation of design driven brands with durable competitive advantages and superior profitability,” commented Andrew B. Cogan, Knoll Chairman, President and CEO.
“This quarter the benefit of these initiatives combined with efforts by our supply chain team to offset continued inflationary pressures led to 100bps of Adjusted EBITDA margin expansion and Adjusted EPS growth of 40%. Looking ahead to the balance of the year we expect to continue to grow our business, expand our margins and delever our balance sheet,” added Mr. Cogan.
Net sales were $323.4 million for the second quarter of 2018, an increase of 20.3%, from the second quarter of 2017. Net sales for the Office segment were $190.8 million during the second quarter of 2018, an increase of 17.3%, when compared with the second 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 ancillary products drove sales growth while legacy system sales were flat. Net sales for the Lifestyle segment were $132.6 million during the second quarter of 2018, an increase of 25.0%, when compared with the second quarter of 2017, while organic sales grew 5.2%. This increase was primarily driven by the inclusion of three months of sales from Muuto as well as increased volume in our contract markets.
Gross profit for the second quarter of 2018 was $119.3 million, an increase of $19.3 million, or 19.3%, when compared with the second quarter of 2017. During the second quarter of 2018, gross margin decreased to 36.9% from 37.2% in the second quarter of 2017. Adjusted gross margin for both the second quarter of 2018 and 2017 was 37.2%. Adjusted gross profit in the second quarter of 2018 excluded an inventory fair value adjustment of $0.9 million related to the acquisition of Muuto. Margins were consistent with the prior year primarily due to the Office segment, where higher volume and a favorable shift of mix towards new product platforms offset unfavorable commodity and transportation inflation.
Operating expenses were $94.5 million for the second quarter of 2018, or 29.2% of net sales, compared to $80.1 million, or 29.8% of net sales, for the second quarter of 2017. Operating expenses in the second quarter of 2018 included acquisition related expenses of $4.1 million, which was comprised of amortization of intangibles of $2.1 million, retention agreements for key employees of $1.5 million, as well as other customary acquisition related expenses of $0.5 million. Operating expenses also included restructuring charges of $0.8 million. The restructuring charges were related to an organizational realignment within the sales and customer service functions that will result in greater operational efficiency and control of $0.3 million as well as supply chain optimization expenses of $0.5 million. Excluding these items, adjusted operating expenses were $89.6 million for the second quarter of 2018, or 27.7% of net sales compared to $77.3 million for the second quarter of 2017. The increase in adjusted operating expenses was related primarily to incremental operating expenses from Muuto, incentive compensation due to increased profitability, and the expansion of our sales force.
During the second quarter of 2018, interest expense was $5.3 million, an increase of $3.4 million when compared to the second quarter of 2017. This increase was due primarily to additional debt as a result of the Muuto acquisition and higher interest rates.
During the second quarter of 2018, other expense was $1.8 million compared to other income of $2.2 million for the second quarter of 2017. Other expense is primarily related to foreign exchange gains and losses 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. The pension settlement charge of $4.6 million was related to the purchase of annuities for certain pension plan retirees as well as cash payments from lump sum elections.
Net earnings for the second quarter of 2018 was $13.1 million, or $0.27 diluted earnings per share, compared to $12.9 million, or $0.26 diluted earnings per share, for the second quarter of 2017. Excluding the impact of the acquisition related inventory adjustment, acquisition related expenses, restructuring charges and the pension settlement charge, adjusted net earnings for the second quarter of 2018 was $20.8 million, or $0.42 adjusted diluted earnings per share, compared to $14.7 million, or $0.30 adjusted diluted earnings per share for the second quarter of 2017.
The effective tax rate for the second quarter of 2018 was 26.0%, down from 35.7% in the second quarter of 2017. The decrease in the effective tax rate for the quarter was primarily due to the passage of the U.S. Tax Cuts and Jobs Act (“Tax Reform”) in 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 second quarter of 2018 totaled $7.6 million compared to $10.1 million in the second quarter of 2017. During the second quarter of 2018, the Company paid a quarterly dividend of $7.3 million, or $0.15 per share, and payment of accrued dividends on vested shares of $0.4 million, compared to payment of a quarterly dividend of $7.3 million, or $0.15 per share during the second quarter of 2017.
Company Appoints Ron Kass to Board of Directors
The Company also announced the appointment of Ron Kass to its Board of Directors, effective July 30. Mr. Kass is the President and CEO of Hunter Douglas, Inc., the North American operations of the world market leader in window coverings and a major manufacturer of architectural products. Prior, he served as President of the Company’s Design Products Group. Mr. Kass has also served as President and CEO of the Robert Allen Group, an international designer, marketer and manufacturer of home furnishings.
Mr. Cogan stated, "We are very pleased to welcome Ron to our Board, and expect to benefit from his strategic and operational expertise as we drive growth in the years ahead."
Mr. Kass holds an A.B. from Brown University and a M.B.A from Harvard Graduate School of Business Administration.
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.
Effective January 1, 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.
