Knoll, Inc. today announced results for the third quarter ended September 30, 2019.
"We delivered another strong quarter of top and bottom line growth led by further share gain in the workplace from both organic investments and past acquisitions like Muuto that have strengthened our position in the fastest growing ancillary areas of the office," noted Knoll Chairman and CEO, Andrew Cogan. "The combination of favorable mix from the growth of our high margin Lifestyle businesses coupled with progress on our lean initiatives and continuous improvement work in our Office segment resulted in the best gross margin performance in over 5 years and the strongest adjusted EBITDA margins since the fourth quarter of 2016."
(1) See Reconciliation of Non-GAAP Financial Measures below.
Net sales were $356.5 million for the third quarter of 2019, an increase of 8.8%, from the third quarter of 2018. Net sales for the Office segment were $219.1 million during the third quarter of 2019, an increase of $18.5 million, or 9.2%, compared to the third quarter of 2018. The increase was driven primarily by investments in expanding our height adjustable table offerings and improved office system products, continued growth in conference room solutions and the addition of Fully, a recently completed acquisition. Net sales for the Lifestyle segment were $137.4 million during the third quarter of 2019, an increase of $10.3 million, or 8.2%, compared with the third quarter of 2018. Sales growth was led by strong growth at Muuto and increased crossover sales in commercial workplace settings.
Gross margin for the third quarter of 2019 was 39.4%, an increase of 190 basis points compared to 37.5% in the prior year. The increase in gross margin was primarily the result of increased volume, continuous improvement initiatives and price realization, partially offset by year-over-year material inflation and tariffs.
Operating expenses were $103.7 million for the third quarter of 2019, or 29.1% of net sales, compared to $89.9 million, or 27.4% of net sales, for the third quarter of 2018. Operating expenses in the third quarter of 2019 included acquisition related amortization of acquired intangible assets of $2.1 million and customary acquisition related expenses of $0.3 million. Operating expenses in the third quarter of 2019 also included debt refinancing fees of $0.5 million and restructuring charges of $0.1 million. Excluding these items, adjusted operating expenses were $100.7 million for the third quarter of 2019, or 28.3% of net sales, compared to $85.9 million, or 26.2% of net sales in the third quarter of 2018. The increase in adjusted operating expenses was related primarily to higher commissions and selling expenses from increased volume, and strategic investments in information technology infrastructure, showrooms, and marketing and product development initiatives.
During the third quarter of 2019, interest expense was $5.5 million, an increase of $0.5 million compared to the third quarter of 2018. In spite of the $35.0 million incremental debt to fund the Fully acquisition, the Company reduced leverage from 2.42x in the second quarter of 2019 to 2.33x in the third quarter of 2019. In the third quarter, the Company completed an amendment and extension of its credit facility. The maturity date was extended to August 2024, and reduced the pricing of borrowings under its term loan and revolving credit facility, as well as unused capacity. All other terms remained consistent. In connection with the amendment and extension, the Company recognized a $0.4 million loss on extinguishment of debt.
Other expense was $7.3 million during third quarter of 2019 compared to other expense of $0.4 million in the prior year. During the third quarter of 2019, the Company initiated payouts for the termination of the Company's pension plan for bargaining unit employees. The termination resulted in a settlement charge of $8.4 million as a result of the purchase of annuities to liquidate the plan. In addition, the Company incurred a settlement charge of $1.4 million in connection with cash payments of lump sum elections. The Company intends to finalize the termination of the bargaining unit plan and expects to realize additional pension settlement charges during the fourth quarter of 2019. Pension settlement charges of $0.6 million in the third quarter of 2018 resulted from cash payments of lump sum elections. Excluding pension settlement charges, other income increased $2.3 million compared to the third quarter of 2018, due primarily to foreign exchange gains driven by the appreciation of the US dollar against the Danish Krone.
Net earnings for the third quarter of 2019 were $17.5 million, or $0.35 per diluted share, compared to $20.3 million, or $0.41 per diluted share, for the third quarter of 2018. Excluding the impact of acquisition related expenses, debt refinancing fees, restructuring charges and pension settlement charges, adjusted net earnings for the third quarter of 2019 were $27.4 million, or $0.55 per adjusted diluted share, compared to $23.7 million, or $0.48 per adjusted diluted share for the third quarter of 2018.
The effective tax rate was 25.4% for the third quarter of 2019, compared to 26.1% for the third quarter of 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 2019 totaled $10.5 million compared to $5.3 million in the prior year. The Company paid a quarterly dividend of $8.4 million, or $0.17 per share in the third quarter of 2019 compared to a quarterly dividend of $7.3 million, or $0.15 per share in the third quarter of 2018.
Business Segment Results
The Company has two reportable segments: Office and Lifestyle. The Office reportable segment is comprised of the operations of the Office operating segment. The Lifestyle reportable segment is an aggregation of the Lifestyle, Europe, and Muuto operating segments. 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 accessories as well as the international sales of our Office products. The Office segment includes DatesWesier and Fully. DatesWeiser is known for its sophisticated meeting and conference tables and credenzas, sets a standard of design, quality and technology integration. Fully is an ecommerce furniture brand selling height-adjustable desks, ergonomic chairs and accessories principally for individual home offices and small businesses.
The Lifestyle segment includes KnollStudio®, HOLLY HUNT®, 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. 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. 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.
During the first quarter of 2019, the Company changed the structure of its internal organization which caused the composition of its reportable segments to change. As a result, DatesWeiser is now a component of the Office operating segment as opposed to the Lifestyle operating segment.
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.
Reconciliation of Non-GAAP Financial Measures
This press release contains certain non-GAAP financial measures. A "non-GAAP financial measure" is a numerical measure of a company's financial performance that excludes or includes amounts so as to be different than the most directly comparable measure calculated and presented in accordance with U.S. generally accepted accounting principles ("GAAP") in the statements of income, balance sheets, or statements of cash flow of the company. Pursuant to applicable reporting requirements, the company has provided reconciliations below of non-GAAP financial measures to the most directly comparable GAAP measure.
The non-GAAP financial measures presented within the Company's earnings release are Adjusted Operating Expense, Adjusted Operating Profit, Adjusted Operating Profit Margin, Adjusted Net Earnings, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted Diluted Earnings Per Share. These non-GAAP measures are not indicators of our financial performance under GAAP and should not be considered as an alternative to the applicable GAAP measure. These non-GAAP measures have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. In addition, in evaluating these non-GAAP measures, you should be aware that in the future we may incur expenses similar to the adjustments in this press release. Our presentation of these non-GAAP measures should not be construed as an inference that our future results will be unaffected by unusual or infrequent items. We compensate for these limitations by providing equal prominence to our GAAP results and using non-GAAP measures only as supplemental presentations.
The non-GAAP measures presented are utilized by management to evaluate the Company's business performance and profitability by excluding certain items that may not be indicative of our recurring core business operating results. The Company believes that these measures provide additional clarity for investors by excluding specific expenses in an effort to show comparable business operating results for the periods presented.
The following table reconciles Knoll, Inc. Operating Expenses to Adjusted Operating Expenses for the periods indicated.
